[Federal Register Volume 83, Number 92 (Friday, May 11, 2018)]
[Notices]
[Pages 22107-22110]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10039]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No 34-83181; File No. SR-FINRA-2018-018]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Statutory Disqualification Application 
Fees

May 7, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 30, 2018, Financial Industry Regulatory

[[Page 22108]]

Authority, Inc. (``FINRA'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by FINRA. FINRA has designated the proposed rule change as 
``establishing or changing a due, fee or other charge'' under Section 
19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-4(f)(2) thereunder,\4\ 
which renders the proposal effective upon receipt of this filing by the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend Section 12 to Schedule A of the FINRA 
By-Laws, regarding statutory disqualification application fees.
    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA is proposing to increase the fee to file an application for 
an eligibility proceeding under the Rule 9520 Series (Eligibility 
Proceedings) for the first time since 1994.\5\ Pursuant to Article III, 
Section 3 of the FINRA By-Laws, a member is ineligible for continuance 
in membership where the member associates with a person who is subject 
to a ``statutory disqualification'' (``SD'') \6\ or the member itself 
is subject to an SD. The Rule 9520 Series sets forth procedures for a 
person to become or remain associated with a member, notwithstanding 
the existence of an SD, 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. A member or person 
associated with a member may request relief from the eligibility 
requirements by filing an application with FINRA (``SD 
Application'').\7\
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 34897 (October 26, 
1994), 59 FR 54648 (November 1, 1994) (Order Approving File No. SR-
NASD-94-57) (increasing the SD Application Fee from $1,000 to 
$1,500).
    \6\ Article III, Section 4 of the FINRA By-Laws incorporates the 
definition of ``statutory disqualification'' under Section 3(a)(39) 
of the Act.
    \7\ Rule 9520 Series sets forth eligibility proceedings under 
which FINRA may allow a member, person associated with a member, 
potential member, or potential associated person subject to an SD to 
enter or remain in the securities industry.
---------------------------------------------------------------------------

    Currently, Section 12 to Schedule A of the By-Laws (Application and 
Annual Fee for Member Firms with Statutorily Disqualified Individuals) 
provides that a member must pay to FINRA a fee of $1,500 to file an SD 
Application (``SD Application Fee'') when it seeks to employ or 
continue to employ as an associated person any individual who is 
subject to an SD (Form MC-400). In contrast, FINRA currently does not 
require a member to pay a fee to file an SD Application where the 
member itself is subject to an SD (Form MC-400A). Since 1994, FINRA has 
not made any adjustments to the SD Application Fee.
    SD Applications take significant staff time and resources to 
research and review, as each application is assessed on a case-by-case 
basis. While the number of SD Applications has remained relatively 
constant and the SD Application Fee has remained unchanged, the 
complexity of the applications and the time needed to investigate them 
through, for example, public records searches, discussions with federal 
and state regulators, and contacts with state and federal courts, has 
increased. Moreover, even in 1994, the SD Application Fee of $1,500 was 
insufficient to cover the average costs associated with the processing 
and review of SD Applications.\8\
---------------------------------------------------------------------------

    \8\ See supra note 5, 59 FR at 54649 (noting that the average 
costs associated with the processing and review of SD Applications 
was more than $1,500 in 1994).
---------------------------------------------------------------------------

    In order to offset more of the costs associated with FINRA staff's 
thorough assessment of SD Applications, the proposed rule change would 
amend Section 12 to Schedule A of the FINRA By-Laws by increasing from 
$1,500 to $5,000 the SD Application Fee for filing a Form MC-400. In 
addition, the proposed rule change would impose, for the first time, an 
SD Application Fee of $5,000 on SD Applications for filing a Form MC-
400A where the member itself is the subject of the SD. Specifically, 
Section 12 to Schedule A of the FINRA By-Laws would be revised to 
require any member firm, or applicant for membership under NASD Rule 
1013 that is subject to a disqualification as set forth in Article III, 
Section 4 of the By-Laws of the Corporation that seeks to enter, or be 
continued in, membership to pay FINRA a fee of $5,000.
    FINRA has filed the proposed rule change for immediate 
effectiveness. The implementation date will be May 30, 2018.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\9\ which requires, among 
other things, that FINRA rules provide for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system that FINRA operates or 
controls. FINRA believes that the proposed rule change more equitably 
allocates among member firms the costs incurred for time and resources 
needed to thoroughly review and assess SD Applications.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA has undertaken an 
economic impact assessment, as set forth below, to analyze the 
regulatory need for the proposed rulemaking and its potential economic 
impacts, including anticipated costs and benefits.
1. Economic Impact Assessment
a. Regulatory Need
    As discussed above, SD Applications take significant FINRA staff 
time and resources to research and review; due to the unique facts and 
circumstances of each SD matter, each application is assessed on a 
case-by-case basis. The current SD Application Fee for Form MC-400 
applications is insufficient to cover the costs associated with the 
review of these applications. Further, FINRA currently does not require 
a member firm to pay a fee for the review of Form MC-400A applications, 
but FINRA still must commit resources to

[[Page 22109]]

review these applications. As a result, the current SD Application Fee 
is even less sufficient to cover the current costs associated with the 
staff's assessment of all SD Applications, requiring a significant 
portion of costs to conduct these assessments to be borne indirectly by 
non-SD applicant member firms. The proposed rule change serves as an 
economic transfer of some of the costs associated with the review from 
unrelated parties to the immediate parties seeking the relief.
b. Economic Baseline
    The economic baseline used to evaluate the impact of the proposed 
amendments is the current regulatory framework. This baseline serves as 
the primary point of comparison for assessing the economic impacts, 
including the incremental benefits and costs of the proposed rule 
change. FINRA reviewed the SD Applications that were filed during 2013-
2016 (``review period''). Based on this review, FINRA estimates that 
there were 167 SD Applications filed by 135 member firms during the 
review period. Of the 167 SD Applications, FINRA identified 122 Form 
MC-400 applications and 45 Form MC-400A applications.\10\ FINRA further 
estimates that approximately 50% of these applications were filed by 
small firms, 17% by mid-sized firms and 33% by large firms.\11\
---------------------------------------------------------------------------

    \10\ Approximately 84% of the filing member firms submitted one 
SD Application, whereas the remaining 16% of the filing member firms 
submitted two or more SD Applications during the review period. 
Further, the total number of SD Applications for the review period 
excludes 52 MC-400A applications filed in 2015 and 12 in 2016 in 
connection with the SEC's Municipalities Continuing Disclosure 
Cooperation (MCDC) Initiative. Applications filed in connection with 
the MCDC Initiative are excluded from the calculation for the review 
period because they were the result of an industry-wide settlement 
and, as such, would disproportionately impact the review numbers 
outside the normal course. See https://www.sec.gov/divisions/enforce/municipalities-continuing-disclosure-cooperation-initiative.shtml.
    \11\ Based on FINRA By-Laws, Article I (Definitions), member 
firms with 150 or fewer registered persons are classified as small, 
member firms with 151-499 registered persons are classified as mid-
size, and member firms with 500 or more registered persons are 
classified as large.
---------------------------------------------------------------------------

c. Economic Impacts
    FINRA examined the time required of its staff to review all SD 
Applications filed during the review period and the reviewing staff's 
compensation associated with the review of these SD Applications. Based 
on that analysis, FINRA determined that the current SD Application Fee 
of $1,500 for Form MC-400 applications is insufficient to cover the 
costs associated with FINRA's review of such applications and even less 
sufficient to cover the costs associated with FINRA's review of all SD 
Applications.
    The impact of this proposal would be to help shift more of the 
costs associated with reviewing SD Applications to the member firms 
that file Form MC-400 or Form MC-400A applications. As noted above, 
FINRA identified 122 Form MC-400 and 45 Form MC-400A applications 
during the review period. Based on the proposed increase in the SD 
Application Fee for both Form MC-400 and Form MC-400A applications to 
$5,000, FINRA estimates that the total cost to all SD applicants would 
increase by $163,000 on average each year, if applications remain at 
their historical levels. For the set of member firms that submitted SD 
Applications during the review period, the proposed fee increase would 
have led to an annual increased cost of $3,500-$13,500 per firm, with a 
median increased cost of $3,500 per member firm.\12\
---------------------------------------------------------------------------

    \12\ The incremental costs are calculated on an annual, per firm 
basis. For each member firm submitting a Form MC-400 or Form MC-400A 
application, FINRA assigned an incremental cost of $3,500 for each 
Form MC-400 application filed and $5,000 for each Form MC-400A 
application filed in that year. The range represents the total 
aggregate incremental cost per submitting firm, per year. Thus, 
$3,500 represents the cost of a member firm that submitted only one 
Form MC-400 in a given year and $13,500 reflects the cost of a 
member firm that submitted two Form MC-400A applications and one 
Form MC-400 application in that year.
---------------------------------------------------------------------------

    Shifting more of the burden of the costs associated with the review 
of SD Applications to the SD applicants also may affect their behavior. 
For instance, increasing the SD Application Fee may dissuade some 
member firms from seeking to employ or continuing to employ statutorily 
disqualified individuals. The increased fees also may cause some member 
firms to be more selective in instances where they might decide to 
employ such individuals. In general, some member firms that today may 
submit an SD Application at little or no cost, may determine that it is 
no longer in their best interest to do so.
    These impacts would likely be higher for smaller firms, cash 
constrained firms, and firms that anticipate that the likelihood of the 
application being accepted is low ex ante. Any reduction in the number 
of SD Applications would lead to less FINRA staff time and resources 
spent on the review of SD Applications, decreasing the costs associated 
with the review of such applications and further reducing the aggregate 
economic transfer to SD applicants.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \13\ and paragraph (f)(2) of Rule 19b-4 
thereunder.\14\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act. If 
the Commission takes such action, the Commission shall institute 
proceedings to determine whether the proposed rule should be approved 
or disapproved.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

IV. 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 [email protected]. Please include 
File Number SR-FINRA-2018-018 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2018-018. 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 website (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

[[Page 22110]]

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 website viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE, Washington, DC 20549, on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
such filing also will be available for inspection and copying at the 
principal office of FINRA. All comments received will be posted without 
change. Persons submitting comments are cautioned that we do not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly.
    All submissions should refer to File Number SR-FINRA-2018-018 and 
should be submitted on or before June 1, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo Aleman,
Assistant Secretary.
[FR Doc. 2018-10039 Filed 5-10-18; 8:45 am]
 BILLING CODE 8011-01-P


