83_FR_25167 83 FR 25062 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to District Committee Structure and Governance

83 FR 25062 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to District Committee Structure and Governance

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 105 (May 31, 2018)

Page Range25062-25066
FR Document2018-11728

Federal Register, Volume 83 Issue 105 (Thursday, May 31, 2018)
[Federal Register Volume 83, Number 105 (Thursday, May 31, 2018)]
[Notices]
[Pages 25062-25066]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-11728]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83332; File No. SR-FINRA-2018-021]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change Relating to District Committee Structure and 
Governance

May 25, 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 May 18, 2018, Financial Industry Regulatory 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 constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the By-Laws of FINRA Regulation, Inc. 
(``FINRA Regulation By-Laws'' or ``By-Laws''), FINRA's regulatory 
subsidiary, with regard to the District Committee structure and 
governance by, among other things, reorganizing the District Committees 
into Regional Committees that mirror the regions in which FINRA's 
districts are administratively grouped and managed by FINRA and 
revising candidate and member voting eligibility standards in a manner 
designed to result in committees that better reflect the industry and 
members within each region. The proposed rule change also makes 
conforming amendments to the FINRA Regulation By-Laws and FINRA rules 
to replace, where appropriate, District Committee references with 
Regional Committee references.\4\
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    \4\ The current FINRA rulebook consists of: (1) FINRA Rules; (2) 
NASD Rules; and (3) rules incorporated from New York Stock Exchange 
LLC (``NYSE'') (``Incorporated NYSE Rules'') (together, the NASD 
Rules and Incorporated NYSE Rules are referred to as the 
``Transitional Rulebook''). While the NASD Rules generally apply to 
all FINRA members, the Incorporated NYSE Rules apply only to those 
members of FINRA that are also members of the NYSE (``Dual 
Members''). The FINRA Rules apply to all FINRA members, unless such 
rules have a more limited application by their terms. For more 
information about the rulebook consolidation process, see 
Information Notice, March 12, 2008 (Rulebook Consolidation Process).
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    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
a. Background
    In March 2017, FINRA issued a Special Notice \5\ on engagement 
soliciting comment regarding its engagement programs, including FINRA's 
District Committees generally. Several commenters to the Special Notice 
provided observations and suggestions regarding the District 
Committees.\6\ Some commenters commended the District Committees,\7\ 
noting among other things, that they provide an opportunity to interact 
with FINRA senior staff,\8\ serve as an important means of receiving 
constructive feedback,\9\ and provide important service on disciplinary 
panels.\10\ One commenter also stated that the committee meetings offer 
FINRA the opportunity to obtain more field-based feedback from 
financial advisors that directly serve investors and that the financial 
advisors benefit from open dialogue on timely, relevant topics.\11\ 
Another commenter, however, questioned the committees' usefulness, 
referring to the committee meetings as ``one-way information 
session[s]'' about soon-to-be-introduced rules.\12\ In a different 
vein, one commenter suggested increasing committee ``diversity'' by 
including non-industry representatives.\13\
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    \5\ Special Notice--Engagement Initiative (March 21, 2017), 
available at http://www.finra.org/industry/special-notice-032117. 
The comment period closed on June 19, 2017. FINRA received 46 
comment letters in response to the Special Notice.
    \6\ Richard Wallace (``Wallace''), Wells Fargo Advisors (``Wells 
Fargo''), National Society of Compliance Professionals (``NSCP''), 
Commonwealth Financial Network (``Commonwealth''), Richard K. Bryant 
(``Bryant''), Midwest Region Committees, Elmcore Securities, LLC, 
Better Markets, Inc., Financial Services Institute (``FSI'') and 
Lara, May & Associates, LLC (``Lara, May'').
    \7\ Wallace, Commonwealth, NSCP, Wells Fargo, and FSI.
    \8\ Commonwealth.
    \9\ FSI.
    \10\ Wallace.
    \11\ Wells Fargo. The commenter also recommended adding two 
quarterly teleconference District Committee meetings in addition to 
the District Committees' bi-annual in-person meetings.
    \12\ Bryant.
    \13\ Better Markets, Inc.
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    In addition to the Special Notice feedback, FINRA has noted the 
membership's general lack of interest in District Committee service. 
The number of District Committee seat vacancies is the primary 
indicator of the membership's declining interest in District Committee 
service. For the past six years, there has been an average of 29 vacant 
District Committee seats per year. Of this 29-seat average, 13 
(approximately 45%) have been contested seats (two or more candidates), 
eight (approximately 28%) have been seats with only one candidate, and 
eight (approximately 28%) have been seats without any candidates, thus 
requiring FINRA to find an eligible person to appoint to the seat.\14\
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    \14\ See FINRA Regulation By-Laws, Article VIII, Section 8.8(b) 
(in the event there is no candidate designated for a vacant seat, 
FINRA's Chief Executive Officer or his or her designee shall appoint 
a qualified individual to fill the vacancy for a full term). A 
number of reasons may contribute to individuals' failure to pursue a 
District Committee seat, such as a lack of awareness by some members 
of the opportunity and benefits of serving on a District Committee, 
a perceived lack of time to devote to the position or an 
individual's belief that he or she lacks sufficient industry 
experience to carry out a District Committee member's 
responsibilities. In addition, based on the Special Notice 
commenters' feedback outlined above, some people may not consider 
the District Committees to be useful or performing a meaningful 
role.

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[[Page 25063]]

b. Proposed Rule Change
    FINRA is proposing to amend the FINRA Regulation By-Laws to 
reorganize the District Committees as Regional Committees and to modify 
the committees' size, structure, and governance to respond to Special 
Notice feedback and address decreasing interest in District Committee 
service.
Reorganizing District Committees as Regional Committees
    The By-Laws require the FINRA Regulation Board of Directors 
(``FINRA Regulation Board'') \15\ to establish districts to assist with 
the administration of its affairs and provide that the FINRA Regulation 
Board may organize the districts into regions to promote efficiency and 
sound administration.\16\ The By-Laws further provide that the FINRA 
Regulation Board may make changes from time to time in the number or 
boundaries of the districts or regions as it deems necessary or 
appropriate.\17\ The FINRA Regulation Board has established 11 
districts, overseen by FINRA District Offices, and has organized them 
into five regions:
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    \15\ FINRA Regulation, Inc. (``FINRA Regulation'') is a 
subsidiary of FINRA that operates according to the Plan of 
Allocation and Delegation of Functions by FINRA to FINRA Regulation, 
Inc.
    \16\ See FINRA Regulation By-Laws, Article VIII, Section 8.1 
(Establishment of Districts and Regions).
    \17\ See supra note 16.
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     West (Districts 1 (San Francisco), 2 (Los Angeles) and 3 
(Denver));
     Midwest (Districts 4 (Kansas City) and 8 (Chicago));
     South (Districts 5 (New Orleans), 6 (Dallas) and 7 
(Atlanta and Boca Raton));
     North (Districts 9 (Philadelphia and New Jersey) and 11 
(Boston)); and
     New York (District 10 (Long Island and New York)).\18\
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    \18\ See Schedule A to FINRA Regulation By-Laws and http://www.finra.org/industry/finra-district-offices.
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    Pursuant to the By-Laws, each district elects a District 
Committee.\19\ FINRA currently manages the 11 District Committees as 
region-wide committees based on the administrative groupings outlined 
above, including having them meet bi-annually on a regional basis.\20\
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    \19\ See FINRA Regulation By-Laws, Article VIII, Section 8.2(a).
    \20\ See Securities Exchange Act Release No. 64363 (April 28, 
2011), 76 FR 25397 (May 4, 2011) (Order Approving File No. SR-FINRA-
2011-011) (``2011 Rule Filing Approval Order'') (amending the By-
Laws to, among other things, codify the practice of having the 
District Committees meet on a regional basis).
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    FINRA proposes to formally restructure the District Committees as 
Regional Committees. The proposed change will align the committee 
structure with FINRA's practice of managing the District Committees as 
region-wide committees.
Regional Committee Composition and Size
    FINRA proposes amending Section 8.2(a) of the FINRA Regulation By-
Laws to require that each Regional Committee have six elected members 
from each district within that committee's region. Regional Committees 
representing three districts (i.e., the South and West) will have 18 
members, and Regional Committees representing two districts (i.e., 
Midwest, North, and New York) will have 12 members. Currently, District 
Committees are generally composed of seven to 14 elected members, with 
each committee reflecting a configuration of three small, one mid-size 
and three large firm representatives.\21\ The three-one-three 
composition is intended to align District Committee representation more 
closely with the industry representation on the FINRA Board.\22\ 
However, that configuration does not necessarily reflect the industry 
composition within the regions as each region differs regarding firm 
number, size and business lines. For instance, while the vast majority 
of branch offices within each region are large firm branch offices, 
most of the firms headquartered in each region are small firms.\23\ In 
addition, when vacancies arise, the three-one-three District Committee 
configuration can make it more challenging to find eligible individuals 
within the districts who can be appointed to serve as committee 
members. Although large firms have many branches per district, FINRA 
staff has found it more difficult to find large-firm individuals to 
serve in districts where the firm is not headquartered. Conversely, 
FINRA staff has found that small-firm individuals are interested in 
committee service, but otherwise eligible individuals cannot be 
appointed if the prescribed small-firm committee positions are already 
filled. Thus, FINRA is not proposing to retain the three-one-three 
configuration.
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    \21\ See FINRA Regulation By-Laws, Article VIII, Section 8.2(a); 
see also FINRA Regulation By-Laws, Article I, paragraph (jj) 
(definition of ``Small Firm''), FINRA Regulation By-Laws, Article I, 
paragraph (aa) (definition of ``Mid-Size Firm''), and FINRA 
Regulation By-Laws, Article I, paragraph (y) (definition of ``Large 
Firm'').
    \22\ See supra note 20 (2011 Rule Filing Approval Order amending 
the FINRA Regulation By-Laws to, among other things, adjust the size 
and composition of the District Committees to require three-sevenths 
of the District Committee members to be associated with Small Firms 
(up to 150 registered persons), one-seventh with Mid-Size Firms (151 
to 499 registered persons), and three-sevenths with Large Firms (500 
or more registered persons), thereby aligning District Committee 
representation more closely with the industry representation on the 
FINRA Board).
    \23\ Based on data from the Central Registration Depository 
(``Web CRD''[supreg]), the West Region has 31,075 large-firm, 2,198 
mid-size-firm, and 2,292 small-firm branch offices and 24 large 
firms, 24 mid-size firms, and 592 small firms headquartered in the 
region. The Midwest Region has 34,661 large-firm, 3,071 mid-size-
firm, and 2,269 small-firm branch offices and 48 large firms, 50 
mid-size firms, and 486 small firms headquartered in the region. The 
South Region has 36,290 large-firm, 2,680 mid-size-firm, and 2,560 
small-firm branch offices and 26 large firms, 33 mid-size firms, and 
606 small firms headquartered in the region. The North Region has 
28,663 large-firm, 1,899 mid-size-firm, and 2,392 small-firm branch 
offices and 39 large firms, 47 mid-size firms, and 726 small firms 
headquartered in the region. The New York Region has 4,022 large-
firm, 463 mid-size-firm, and 1,590 small-firm branch offices and 40 
large firms, 42 mid-size firms, and 936 small firms headquartered in 
the region.
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    The proposed amendments would reduce the number of committee 
members in the West and South regions from 21 to 18 and in the Midwest, 
North, and New York regions from 14 to 12. This size recalibration is 
intended to align the number of committee seats with the declining 
membership interest in committee service while still maintaining 
adequate district-level representation on the Regional Committees.\24\
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    \24\ The proposed amendments to Section 8.2(a) retain the 
current committee size parameters that a committee consist of no 
fewer than five and no more than 20 members, unless otherwise 
provided by resolution of the FINRA Regulation Board and the 
provision that any reduction in the authorized number of such 
members shall not shorten any existing member's term. See proposed 
FINRA Regulation By-Laws, Article VIII, Section 8.2(a).
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Regional Committee Member Eligibility and Member Voting Standards
    FINRA also proposes amending FINRA Regulation By-Laws Section 
8.2(a) to require that each Regional Committee member be associated 
with a FINRA member eligible to vote in the district-level elections 
and work for a FINRA member headquartered within the district the 
member will be representing on the committee. For purposes of the 
provision, a firm is headquartered where it designates its main address 
on the firm's Form BD. A firm can only have one main address on its 
Form BD, and FINRA's member firms are assigned to one of the 11 
districts outlined above based on the location of their main office.
    The proposed eligibility requirement differs from the current 
requirement that

[[Page 25064]]

District Committee members must be associated with a FINRA member firm 
eligible to vote in the district and work primarily from the member's 
principal office or a branch office that is located within the district 
where the member would serve on a District Committee.\25\ FINRA 
believes that requiring committee member candidates to work for a firm 
that is headquartered in the district being represented rather than 
working from a firm's office in a particular district will result in 
committee member candidates that better reflect the type of firms 
within the respective regions, while ensuring that all districts have 
adequate representation within their respective Regional Committees. 
Committee member candidates from firms headquartered in a district also 
often bring regional and product expertise pertinent to that area.
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    \25\ See FINRA Regulation By-Laws, Article VIII, Section 
8.2(a)(1)-(2).
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    FINRA proposes retaining the requirement that a committee member be 
registered in the capacity of a branch manager or principal or denoted 
as a corporate officer of the FINRA member.\26\ This requirement is 
designed to ensure that committee members have requisite experience for 
purposes of participating in meetings.\27\
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    \26\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.2(a)(1).
    \27\ See Securities Exchange Act Release No. 64002 (March 2, 
2011), 76 FR 12390 (March 7, 2011) (Notice of Filing of File No. SR-
FINRA-2011-011).
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    In addition, the proposed amendments retain district-level 
elections for Regional Committee members. As noted above, each district 
within its respective region will elect six Regional Committee 
members.\28\ Each firm headquartered in the district shall be eligible 
to cast one vote for each position to be filled on a district's 
election ballot with the candidate receiving the largest number of 
votes cast by FINRA members eligible to vote in the district filling 
the vacant seat.\29\ The proposed amendments do not retain the current 
requirement that member firms are only eligible to vote for committee 
members based on the applicable classification of the firm with which 
the committee member candidates are associated (e.g., only large firms 
are currently eligible to vote for one of the three large-firm 
committee member candidates).\30\ Also, as noted previously, firms with 
a branch office located in the district will no longer be eligible to 
vote in the district-level elections (unless a firm with a branch 
office in a particular district is also headquartered in that 
district). However, the proposed change will expand the voting 
opportunities for eligible member firms headquartered within a district 
by providing them the opportunity to cast a vote for every open seat 
rather than requiring that each firm vote only for seats representing 
that firm's size classification (small, mid-size or large). In 
addition, as with the other proposed composition and eligibility 
changes, FINRA believes that the revised voting eligibility 
requirements and election process will reduce potential impediments 
that could hinder Regional Committee composition from reflecting the 
industry within that region. FINRA intends to monitor Regional 
Committee composition and will consider other changes, as appropriate, 
if the proposed changes do not achieve the intended goal. The proposed 
amendments retain the direct candidate self-nomination and vacancy 
appointment process currently used for District Committee 
elections.\31\
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    \28\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.2(a).
    \29\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.9 and Section 8.17.
    \30\ See FINRA Regulation By-Laws, Article VIII, Section 8.9 and 
Section 8.17.
    \31\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.8.
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    As a transitional measure, and to ensure that the Regional 
Committees begin with a full complement of members, upon the proposed 
rule change becoming effective, FINRA would appoint all current 
District Committee members to serve on the Regional Committees. As a 
result, the Regional Committee members initially would include: (1) Any 
current District Committee members from within each region who meet the 
proposed eligibility requirement that the member be associated with a 
firm headquartered in the district the member is representing; and (2) 
the six current District Committee members who do not meet the proposed 
eligibility requirement that they be associated with a member firm 
headquartered within the district they are representing. This 
transitional measure will allow all current committee members to serve 
their full terms, consistent with the By-Laws,\32\ and prevent them 
from being disenfranchised as a result of the proposed rule change.\33\ 
If the number of District Committee members is insufficient to fulfill 
all the Regional Committee seats, FINRA will appoint eligible 
individuals who are willing to serve on the Regional Committees.\34\
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    \32\ See FINRA Regulation By-Laws, Article VIII, Section 8.2(a) 
(providing that no decrease in the authorized number of members of a 
District Committee shall shorten the term of office of any member).
    \33\ Four of the committee members have one year remaining on 
their terms, while the other two committee members have two years 
remaining on their terms.
    \34\ FINRA would appoint the initial Regional Committee members 
using its power to appoint qualified persons to fill Regional 
Committee vacancies where there is no designated candidate. See 
proposed FINRA Regulation By-Laws, Article VIII, Section 8.8(b).
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    The initial 12 or 18 members for each Regional Committee would be 
appointed for rolling terms, with four or six members appointed for 
three years, four or six members appointed for two years, and four or 
six members appointed for one year. As noted previously, the majority 
of the initial Regional Committee members will be current District 
Committee members. FINRA intends to appoint the District Committee 
members for terms concurrent with the expiration of their current 
terms. Thus, the District Committee members elected or appointed in 
2017 for full terms will serve three-year terms, the District Committee 
members elected or appointed in 2016 for full terms will serve two-year 
terms, and the District Committee members elected or appointed in 2015 
for full terms will serve one-year terms. The purpose of the rolling 
terms is to preserve the current practice described below of providing 
that one-third of the committees' positions will be available for 
election each year.
Regional Committee Term of Office and Meeting Location and Frequency
    The proposed amendments retain for Regional Committee members the 
District Committees' three-year ``full term'' limit.\35\ Also, 
consistent with the District Committees' term of office provisions, the 
proposed rule change does not impose a limit on the number of total 
terms that may be served, with the exception that a committee member 
may serve no more than two full terms consecutively.\36\ The proposed 
rule change differs from the current provision that District Committee 
members may not serve two consecutive full terms. The proposed change 
is based, in part, on a Special Notice commenter's suggestion that 
FINRA eliminate the prohibition against District Committee members 
serving two consecutive full terms.\37\ In

[[Page 25065]]

addition, as noted above, the proposed amendments continue the current 
District Committee practice of staggering the three-year committee 
membership terms to provide that one-third of each Regional Committee's 
positions be available for election each year.
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    \35\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.3.
    \36\ See supra note 35. The proposed rule change would not 
prohibit someone appointed or elected to the committee to serve a 
partial term from serving two consecutive terms in addition to the 
partial term.
    \37\ Commonwealth. One Special Notice commenter suggested 
limiting District Committee members to one term. See Elmcore 
Securities, LLC. (noting also that she did not have enough input 
regarding the District Committees' activities to answer the Special 
Notice question asking about the District Committees' usefulness). 
Another commenter approved the current prohibition against serving 
two consecutive full terms. See Midwest Region Committees; see also 
Lara, May (indicating, without further detail, support for the 
current three-year term and term limits). Both commenters supported 
their suggestions as a means of providing more opportunities for 
interested individuals to become committee members and provide 
input. However, as noted above, there has been a general lack of 
interest in committee service. In addition, FINRA does not have any 
evidence supporting the supposition that interest in committee 
service will increase by imposing term limitations.
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    FINRA also proposes that the Regional Committees retain the current 
requirement to meet on a regional basis.\38\ In addition, the Regional 
Committees will meet in-person two times a year, consistent with the 
general practice for District Committee meeting frequency.
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    \38\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.5.
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Regional Committee Regulatory Role and Purpose
    FINRA proposes that the Regional Committees assume the District 
Committees' regulatory roles outlined in the FINRA Regulation By-Laws 
to:
     Serve as panelists in disciplinary proceedings in 
accordance with FINRA rules;
     consider and recommend policies and rule changes to the 
Board; and
     endeavor to educate FINRA members and others as to the 
objects, purposes and work of FINRA and FINRA Regulation.\39\
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    \39\ See proposed FINRA Regulation By-Laws, Article VIII, 
Section 8.2(a).
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    In addition, FINRA intends to have Regional Committee members be 
responsible for communicating high-level information regarding meeting 
discussions to their constituents. This responsibility would be 
consistent with the role noted above that the Regional Committees 
educate FINRA members and others regarding FINRA and its work. The 
added responsibility also is consistent with a Special Notice 
commenter's suggestion that District Committees be used to greater 
effect by helping educate FINRA about district developments.\40\
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    \40\ NSCP.
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Regional Committee Administration and Procedures
    The staff proposes retaining without significant changes (other 
than conforming changes to reflect the proposed elimination of firm-
size classifications and the committee member candidate and member 
voting eligibility criteria that a firm have a principal or branch 
office within a district) the administrative and procedural provisions 
relating to meetings, vacancies, committee support, expenses and 
compensation, self-nomination, ballots, candidate solicitation, voter 
qualification list, extensions of time, and definitions.\41\
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    \41\ See generally proposed FINRA Regulation By-Laws, Article 
VIII, Sections 8.2(b)-(d), 8.4 (Filling of Vacancies on Regional 
Committees), 8.5 (Meetings of Regional Committees), 8.6 (Expenses of 
Regional Committees), 8.7 (Solicitation of Candidates and 
Secretary's Notice to FINRA Members), 8.8 (Self-Nomination of 
Candidates and Vacancy Appointments), 8.10 (Administrative Support), 
8.11 (Ballots), 8.12 (Vote Qualification List), 8.13 (Ballots 
Returned as Undelivered), 8.14 (General Procedures for Qualification 
and Accounting of Ballots), 8.15 (Ballots Set Aside), 8.16 (Invalid 
Ballots), 8.17 (Election Results), 8.18 (Extensions of Time and 
Additional Procedures), 8.19 (Definitions) and 9.1 (Compensation of 
Board, Council, and Committee Members).
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Proposed Conforming Amendments
    FINRA is proposing to amend Article I (Definitions) of the FINRA 
Regulation By-Laws to delete the term ``District Committee'' and add 
the term ``Regional Committee'' \42\ and make conforming amendments to 
the FINRA Regulation By-Laws to replace District Committee references 
with Regional Committee references. FINRA also proposes amending the 
FINRA 9000 Rule Series (Code of Procedure) to replace, where 
appropriate, the term ``District Committee'' with ``Regional 
Committee.'' In addition, FINRA proposes amending FINRA Rule 9120 
(Definitions) to clarify that the ``District Committee'' definition is 
referring to the District Committees that will be replaced by the 
proposed Regional Committees, replace the term ``Primary District 
Committee'' with ``Primary Regional Committee,'' and add the term 
``Regional Committee.'' \43\
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    \42\ See proposed FINRA Regulation By-Laws, Article I(hh) 
(definition of ``Regional Committee'').
    \43\ See proposed amendments to FINRA Rule 9120(g) (adding the 
term ``former'' to the District Committee definition) and FINRA Rule 
9120(y) (replacing the term ``District'' with ``Regional'' in the 
``Primary District Committee'' definition) and proposed FINRA Rule 
9120(z) (``Regional Committee'').
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    FINRA also is proposing amendments to FINRA Rule 9231 (Appointment 
by the Chief Hearing Officer of Hearing Panel or Extended Hearing Panel 
or Replacement Hearing Officer) and FINRA Rule 9820 (Appointment of 
Hearing Officer and Hearing Panel) to clarify that former District 
Committee members and current and former Regional Committee members are 
eligible to serve as disciplinary hearing panelists.\44\ FINRA also is 
exploring options to enlarge the pool of panelists and better educate 
the Regional Committees about the critical function of serving on 
hearing panels in FINRA disciplinary proceedings.
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    \44\ The proposed rule change also updates the cross-reference 
to FINRA Rule 9231 in FINRA Rule 9232(d) (Criteria for Appointment 
of a Panelist).
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    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested that the SEC waive the requirement that 
the proposed rule change not become operative for 30 days after the 
date of the filing so FINRA can implement the proposed rule change 
immediately.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(4) of the Act,\45\ which requires, among 
other things, that FINRA rules must be designed to assure a fair 
representation of its members in the selection of its directors and 
administration of its affairs, and with Section 15A(b)(6) of the 
Act,\46\ which requires, among other things, that FINRA rules must 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. FINRA believes that the 
proposed rule change will result in a more effective Regional Committee 
structure that aligns with how FINRA administratively groups and 
manages the current District Committees. The proposed rule change also 
will continue to provide members with the opportunity to elect and 
serve as committee members. More specifically, the proposed rule change 
will expand the voting opportunities for members headquartered within a 
district by providing them the opportunity to cast a vote for every 
open seat rather than requiring each member to vote only for seats 
representing that member's size classification (small, mid-size or 
large). However, pursuant to the proposed rule change, members with a 
branch office located in the district will no longer be eligible to 
vote in the district-level elections (unless a firm with a branch 
office in a particular district is also headquartered in that 
district). As further detailed above, the representation of Regional 
Committee members will more closely reflect the membership and industry 
configuration within the respective regions.
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    \45\ 15 U.S.C. 78o-3(b)(4).
    \46\ 15 U.S.C. 78o-3(b)(6).

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[[Page 25066]]

    FINRA further believes that the proposed rule change is consistent 
with Section 15A(b)(8) of the Act,\47\ which requires, among other 
things, that FINRA rules must be designed to provide a fair procedure 
for the disciplining of members and persons associated with members. 
The proposed rule change maintains the necessary eligibility 
requirements to ensure that the pool of potential panelists is composed 
of qualified members. In addition, by reducing the number of committee 
members in the West and South Regions from 21 to 18 and in the Midwest, 
North, and New York Regions from 14 to 12, the proposed rule change 
only reduces by 12 the maximum number of eligible panelists who would 
be current committee members. FINRA is exploring options to enlarge the 
pool of panelists and better educate the Regional Committees about the 
critical function of serving on hearing panels in FINRA disciplinary 
proceedings.
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78o-3(b)(8).
---------------------------------------------------------------------------

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. The proposed rule change will 
not impose any direct costs or additional regulatory obligations on 
members. FINRA will continue its practice of covering committee meeting 
costs and expenses committee members incur by attending meetings in 
person.
    The proposed rule change will reduce representation within each 
Regional Committee from seven seats to six seats per district. However, 
FINRA does not believe that it reduces overall opportunities for 
members to interact with FINRA staff or serve on committees. As noted 
in Special Notice, FINRA has over 30 advisory and ad hoc committees 
that include member representatives who routinely provide input and 
feedback on regulatory initiatives, proposed rule changes, and emerging 
regulatory issues. FINRA regularly engages with the industry through 
its public comment process on proposed rule changes. In addition, FINRA 
conducts member outreach through a number of regularly scheduled 
events, including member meetings, round tables, district compliance 
meetings, and conferences.

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 on the 
proposed rule change. As noted above, in March 2017, FINRA issued a 
Special Notice on engagement, which solicited comment regarding FINRA's 
engagement programs, including the District Committees generally, and, 
in response, several commenters discussed the District Committees.\48\
---------------------------------------------------------------------------

    \48\ See supra notes 5 and 6.
---------------------------------------------------------------------------

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \49\ and Rule 19b-
4(f)(6) thereunder.\50\
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78s(b)(3)(A).
    \50\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    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.

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-2018-021 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-2018-021. 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 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-2018-021, and should be submitted 
on or before June 21, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\51\
---------------------------------------------------------------------------

    \51\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-11728 Filed 5-30-18; 8:45 am]
 BILLING CODE 8011-01-P



                                              25062                         Federal Register / Vol. 83, No. 105 / Thursday, May 31, 2018 / Notices

                                                An agency may not conduct or                          FINRA’s districts are administratively                 Committees.6 Some commenters
                                              sponsor, and a person is not required to                grouped and managed by FINRA and                       commended the District Committees,7
                                              respond to, a collection of information                 revising candidate and member voting                   noting among other things, that they
                                              under the PRA unless it displays a                      eligibility standards in a manner                      provide an opportunity to interact with
                                              currently valid OMB control number.                     designed to result in committees that                  FINRA senior staff,8 serve as an
                                                Please direct your written comments                   better reflect the industry and members                important means of receiving
                                              to: Pamela Dyson, Director/Chief                        within each region. The proposed rule                  constructive feedback,9 and provide
                                              Information Officer, Securities and                     change also makes conforming                           important service on disciplinary
                                              Exchange Commission, c/o Remi Pavlik-                   amendments to the FINRA Regulation                     panels.10 One commenter also stated
                                              Simon, 100 F Street NE, Washington,                     By-Laws and FINRA rules to replace,                    that the committee meetings offer
                                              DC 20549, or send an email to: PRA_                     where appropriate, District Committee                  FINRA the opportunity to obtain more
                                              Mailbox@sec.gov.                                        references with Regional Committee                     field-based feedback from financial
                                                Dated: May 24, 2018.                                  references.4                                           advisors that directly serve investors
                                              Eduardo A. Aleman,                                         The text of the proposed rule change                and that the financial advisors benefit
                                              Assistant Secretary.                                    is available on FINRA’s website at                     from open dialogue on timely, relevant
                                              [FR Doc. 2018–11593 Filed 5–30–18; 8:45 am]             http://www.finra.org, at the principal                 topics.11 Another commenter, however,
                                                                                                      office of FINRA and at the                             questioned the committees’ usefulness,
                                              BILLING CODE 8011–01–P
                                                                                                      Commission’s Public Reference Room.                    referring to the committee meetings as
                                                                                                                                                             ‘‘one-way information session[s]’’ about
                                              SECURITIES AND EXCHANGE                                 II. Self-Regulatory Organization’s                     soon-to-be-introduced rules.12 In a
                                              COMMISSION                                              Statement of the Purpose of, and                       different vein, one commenter suggested
                                                                                                      Statutory Basis for, the Proposed Rule                 increasing committee ‘‘diversity’’ by
                                              [Release No. 34–83332; File No. SR–FINRA–               Change                                                 including non-industry
                                              2018–021]
                                                                                                                                                             representatives.13
                                                                                                        In its filing with the Commission,                      In addition to the Special Notice
                                              Self-Regulatory Organizations;                          FINRA included statements concerning
                                              Financial Industry Regulatory                                                                                  feedback, FINRA has noted the
                                                                                                      the purpose of and basis for the                       membership’s general lack of interest in
                                              Authority, Inc.; Notice of Filing and                   proposed rule change and discussed any
                                              Immediate Effectiveness of Proposed                                                                            District Committee service. The number
                                                                                                      comments it received on the proposed                   of District Committee seat vacancies is
                                              Rule Change Relating to District                        rule change. The text of these statements
                                              Committee Structure and Governance                                                                             the primary indicator of the
                                                                                                      may be examined at the places specified                membership’s declining interest in
                                              May 25, 2018.                                           in Item IV below. FINRA has prepared                   District Committee service. For the past
                                                 Pursuant to Section 19(b)(1) of the                  summaries, set forth in sections A, B,                 six years, there has been an average of
                                              Securities Exchange Act of 1934                         and C below, of the most significant                   29 vacant District Committee seats per
                                              (‘‘Act’’) 1 and Rule 19b–4 thereunder,2                 aspects of such statements.                            year. Of this 29-seat average, 13
                                              notice is hereby given that on May 18,                  A. Self-Regulatory Organization’s                      (approximately 45%) have been
                                              2018, Financial Industry Regulatory                     Statement of the Purpose of, and the                   contested seats (two or more
                                              Authority, Inc. (‘‘FINRA’’) filed with the              Statutory Basis for, the Proposed Rule                 candidates), eight (approximately 28%)
                                              Securities and Exchange Commission                      Change                                                 have been seats with only one
                                              (‘‘SEC’’ or ‘‘Commission’’) the proposed                                                                       candidate, and eight (approximately
                                              rule change as described in Items I, II,                1. Purpose                                             28%) have been seats without any
                                              and III below, which Items have been                    a. Background                                          candidates, thus requiring FINRA to
                                              prepared by FINRA. FINRA has                                                                                   find an eligible person to appoint to the
                                              designated the proposed rule change as                    In March 2017, FINRA issued a                        seat.14
                                              constituting a ‘‘non-controversial’’ rule               Special Notice 5 on engagement
                                              change under paragraph (f)(6) of Rule                   soliciting comment regarding its                          6 Richard Wallace (‘‘Wallace’’), Wells Fargo

                                              19b–4 under the Act,3 which renders                     engagement programs, including                         Advisors (‘‘Wells Fargo’’), National Society of
                                              the proposal effective upon receipt of                                                                         Compliance Professionals (‘‘NSCP’’),
                                                                                                      FINRA’s District Committees generally.                 Commonwealth Financial Network
                                              this filing by the Commission. The                      Several commenters to the Special                      (‘‘Commonwealth’’), Richard K. Bryant (‘‘Bryant’’),
                                              Commission is publishing this notice to                 Notice provided observations and                       Midwest Region Committees, Elmcore Securities,
                                              solicit comments on the proposed rule                   suggestions regarding the District                     LLC, Better Markets, Inc., Financial Services
                                              change from interested persons.                                                                                Institute (‘‘FSI’’) and Lara, May & Associates, LLC
                                                                                                                                                             (‘‘Lara, May’’).
                                                                                                         4 The current FINRA rulebook consists of: (1)
                                              I. Self-Regulatory Organization’s                                                                                 7 Wallace, Commonwealth, NSCP, Wells Fargo,
                                                                                                      FINRA Rules; (2) NASD Rules; and (3) rules             and FSI.
                                              Statement of the Terms of Substance of                  incorporated from New York Stock Exchange LLC             8 Commonwealth.
                                              the Proposed Rule Change                                (‘‘NYSE’’) (‘‘Incorporated NYSE Rules’’) (together,       9 FSI.
                                                                                                      the NASD Rules and Incorporated NYSE Rules are
                                                 FINRA is proposing to amend the By-                  referred to as the ‘‘Transitional Rulebook’’). While
                                                                                                                                                                10 Wallace.

                                              Laws of FINRA Regulation, Inc.                          the NASD Rules generally apply to all FINRA
                                                                                                                                                                11 Wells Fargo. The commenter also

                                              (‘‘FINRA Regulation By-Laws’’ or ‘‘By-                  members, the Incorporated NYSE Rules apply only        recommended adding two quarterly teleconference
                                                                                                      to those members of FINRA that are also members        District Committee meetings in addition to the
                                              Laws’’), FINRA’s regulatory subsidiary,                                                                        District Committees’ bi-annual in-person meetings.
                                                                                                      of the NYSE (‘‘Dual Members’’). The FINRA Rules
                                              with regard to the District Committee                   apply to all FINRA members, unless such rules             12 Bryant.
                                              structure and governance by, among
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                                                                                                      have a more limited application by their terms. For       13 Better Markets, Inc.

                                              other things, reorganizing the District                 more information about the rulebook consolidation         14 See FINRA Regulation By-Laws, Article VIII,

                                              Committees into Regional Committees                     process, see Information Notice, March 12, 2008        Section 8.8(b) (in the event there is no candidate
                                                                                                      (Rulebook Consolidation Process).                      designated for a vacant seat, FINRA’s Chief
                                              that mirror the regions in which                           5 Special Notice—Engagement Initiative (March       Executive Officer or his or her designee shall
                                                                                                      21, 2017), available at http://www.finra.org/          appoint a qualified individual to fill the vacancy for
                                                1 15 U.S.C. 78s(b)(1).                                industry/special-notice-032117. The comment            a full term). A number of reasons may contribute
                                                2 17 CFR 240.19b–4.                                   period closed on June 19, 2017. FINRA received 46      to individuals’ failure to pursue a District
                                                3 17 CFR 240.19b–4(f)(6).                             comment letters in response to the Special Notice.     Committee seat, such as a lack of awareness by



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                                                                            Federal Register / Vol. 83, No. 105 / Thursday, May 31, 2018 / Notices                                                          25063

                                              b. Proposed Rule Change                                    FINRA proposes to formally                               when vacancies arise, the three-one-
                                                FINRA is proposing to amend the                       restructure the District Committees as                      three District Committee configuration
                                              FINRA Regulation By-Laws to                             Regional Committees. The proposed                           can make it more challenging to find
                                              reorganize the District Committees as                   change will align the committee                             eligible individuals within the districts
                                              Regional Committees and to modify the                   structure with FINRA’s practice of                          who can be appointed to serve as
                                              committees’ size, structure, and                        managing the District Committees as                         committee members. Although large
                                                                                                      region-wide committees.                                     firms have many branches per district,
                                              governance to respond to Special Notice
                                                                                                                                                                  FINRA staff has found it more difficult
                                              feedback and address decreasing                         Regional Committee Composition and
                                                                                                                                                                  to find large-firm individuals to serve in
                                              interest in District Committee service.                 Size
                                                                                                                                                                  districts where the firm is not
                                              Reorganizing District Committees as                        FINRA proposes amending Section                          headquartered. Conversely, FINRA staff
                                              Regional Committees                                     8.2(a) of the FINRA Regulation By-Laws                      has found that small-firm individuals
                                                                                                      to require that each Regional Committee                     are interested in committee service, but
                                                The By-Laws require the FINRA                         have six elected members from each
                                              Regulation Board of Directors (‘‘FINRA                                                                              otherwise eligible individuals cannot be
                                                                                                      district within that committee’s region.                    appointed if the prescribed small-firm
                                              Regulation Board’’) 15 to establish                     Regional Committees representing three
                                              districts to assist with the                                                                                        committee positions are already filled.
                                                                                                      districts (i.e., the South and West) will                   Thus, FINRA is not proposing to retain
                                              administration of its affairs and provide               have 18 members, and Regional                               the three-one-three configuration.
                                              that the FINRA Regulation Board may                     Committees representing two districts                          The proposed amendments would
                                              organize the districts into regions to                  (i.e., Midwest, North, and New York)                        reduce the number of committee
                                              promote efficiency and sound                            will have 12 members. Currently,                            members in the West and South regions
                                              administration.16 The By-Laws further                   District Committees are generally                           from 21 to 18 and in the Midwest,
                                              provide that the FINRA Regulation                       composed of seven to 14 elected                             North, and New York regions from 14 to
                                              Board may make changes from time to                     members, with each committee                                12. This size recalibration is intended to
                                              time in the number or boundaries of the                 reflecting a configuration of three small,                  align the number of committee seats
                                              districts or regions as it deems necessary              one mid-size and three large firm                           with the declining membership interest
                                              or appropriate.17 The FINRA Regulation                  representatives.21 The three-one-three                      in committee service while still
                                              Board has established 11 districts,                     composition is intended to align District                   maintaining adequate district-level
                                              overseen by FINRA District Offices, and                 Committee representation more closely                       representation on the Regional
                                              has organized them into five regions:                   with the industry representation on the                     Committees.24
                                                • West (Districts 1 (San Francisco), 2                FINRA Board.22 However, that
                                              (Los Angeles) and 3 (Denver));                                                                                      Regional Committee Member Eligibility
                                                                                                      configuration does not necessarily
                                                • Midwest (Districts 4 (Kansas City)                  reflect the industry composition within
                                                                                                                                                                  and Member Voting Standards
                                              and 8 (Chicago));                                       the regions as each region differs                             FINRA also proposes amending
                                                • South (Districts 5 (New Orleans), 6                 regarding firm number, size and                             FINRA Regulation By-Laws Section
                                              (Dallas) and 7 (Atlanta and Boca                        business lines. For instance, while the                     8.2(a) to require that each Regional
                                              Raton));                                                vast majority of branch offices within                      Committee member be associated with a
                                                • North (Districts 9 (Philadelphia and                each region are large firm branch offices,                  FINRA member eligible to vote in the
                                              New Jersey) and 11 (Boston)); and                       most of the firms headquartered in each                     district-level elections and work for a
                                                • New York (District 10 (Long Island                  region are small firms.23 In addition,                      FINRA member headquartered within
                                              and New York)).18                                                                                                   the district the member will be
                                                Pursuant to the By-Laws, each district                Approving File No. SR–FINRA–2011–011) (‘‘2011               representing on the committee. For
                                              elects a District Committee.19 FINRA                    Rule Filing Approval Order’’) (amending the By-             purposes of the provision, a firm is
                                              currently manages the 11 District                       Laws to, among other things, codify the practice of         headquartered where it designates its
                                                                                                      having the District Committees meet on a regional
                                              Committees as region-wide committees                    basis).
                                                                                                                                                                  main address on the firm’s Form BD. A
                                              based on the administrative groupings                      21 See FINRA Regulation By-Laws, Article VIII,           firm can only have one main address on
                                              outlined above, including having them                   Section 8.2(a); see also FINRA Regulation By-Laws,          its Form BD, and FINRA’s member firms
                                              meet bi-annually on a regional basis.20                 Article I, paragraph (jj) (definition of ‘‘Small Firm’’),   are assigned to one of the 11 districts
                                                                                                      FINRA Regulation By-Laws, Article I, paragraph              outlined above based on the location of
                                                                                                      (aa) (definition of ‘‘Mid-Size Firm’’), and FINRA
                                              some members of the opportunity and benefits of
                                                                                                      Regulation By-Laws, Article I, paragraph (y)                their main office.
                                              serving on a District Committee, a perceived lack                                                                      The proposed eligibility requirement
                                                                                                      (definition of ‘‘Large Firm’’).
                                              of time to devote to the position or an individual’s
                                              belief that he or she lacks sufficient industry
                                                                                                         22 See supra note 20 (2011 Rule Filing Approval          differs from the current requirement that
                                              experience to carry out a District Committee            Order amending the FINRA Regulation By-Laws to,
                                              member’s responsibilities. In addition, based on the    among other things, adjust the size and composition         size-firm, and 2,560 small-firm branch offices and
                                              Special Notice commenters’ feedback outlined            of the District Committees to require three-sevenths        26 large firms, 33 mid-size firms, and 606 small
                                              above, some people may not consider the District        of the District Committee members to be associated          firms headquartered in the region. The North
                                              Committees to be useful or performing a meaningful      with Small Firms (up to 150 registered persons),            Region has 28,663 large-firm, 1,899 mid-size-firm,
                                              role.                                                   one-seventh with Mid-Size Firms (151 to 499                 and 2,392 small-firm branch offices and 39 large
                                                 15 FINRA Regulation, Inc. (‘‘FINRA Regulation’’)     registered persons), and three-sevenths with Large          firms, 47 mid-size firms, and 726 small firms
                                                                                                      Firms (500 or more registered persons), thereby             headquartered in the region. The New York Region
                                              is a subsidiary of FINRA that operates according to
                                                                                                      aligning District Committee representation more             has 4,022 large-firm, 463 mid-size-firm, and 1,590
                                              the Plan of Allocation and Delegation of Functions
                                                                                                      closely with the industry representation on the             small-firm branch offices and 40 large firms, 42
                                              by FINRA to FINRA Regulation, Inc.
                                                 16 See FINRA Regulation By-Laws, Article VIII,
                                                                                                      FINRA Board).                                               mid-size firms, and 936 small firms headquartered
                                                                                                         23 Based on data from the Central Registration           in the region.
                                              Section 8.1 (Establishment of Districts and Regions).
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                                                 17 See supra note 16.
                                                                                                      Depository (‘‘Web CRD’’®), the West Region has                 24 The proposed amendments to Section 8.2(a)
                                                                                                      31,075 large-firm, 2,198 mid-size-firm, and 2,292           retain the current committee size parameters that a
                                                 18 See Schedule A to FINRA Regulation By-Laws
                                                                                                      small-firm branch offices and 24 large firms, 24            committee consist of no fewer than five and no
                                              and http://www.finra.org/industry/finra-district-       mid-size firms, and 592 small firms headquartered           more than 20 members, unless otherwise provided
                                              offices.                                                in the region. The Midwest Region has 34,661 large-         by resolution of the FINRA Regulation Board and
                                                 19 See FINRA Regulation By-Laws, Article VIII,
                                                                                                      firm, 3,071 mid-size-firm, and 2,269 small-firm             the provision that any reduction in the authorized
                                              Section 8.2(a).                                         branch offices and 48 large firms, 50 mid-size firms,       number of such members shall not shorten any
                                                 20 See Securities Exchange Act Release No. 64363     and 486 small firms headquartered in the region.            existing member’s term. See proposed FINRA
                                              (April 28, 2011), 76 FR 25397 (May 4, 2011) (Order      The South Region has 36,290 large-firm, 2,680 mid-          Regulation By-Laws, Article VIII, Section 8.2(a).



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                                              25064                         Federal Register / Vol. 83, No. 105 / Thursday, May 31, 2018 / Notices

                                              District Committee members must be                      eligible to vote in the district-level                eligible individuals who are willing to
                                              associated with a FINRA member firm                     elections (unless a firm with a branch                serve on the Regional Committees.34
                                              eligible to vote in the district and work               office in a particular district is also                 The initial 12 or 18 members for each
                                              primarily from the member’s principal                   headquartered in that district).                      Regional Committee would be
                                              office or a branch office that is located               However, the proposed change will                     appointed for rolling terms, with four or
                                              within the district where the member                    expand the voting opportunities for                   six members appointed for three years,
                                              would serve on a District Committee.25                  eligible member firms headquartered                   four or six members appointed for two
                                              FINRA believes that requiring                           within a district by providing them the               years, and four or six members
                                              committee member candidates to work                     opportunity to cast a vote for every open             appointed for one year. As noted
                                              for a firm that is headquartered in the                 seat rather than requiring that each firm             previously, the majority of the initial
                                              district being represented rather than                  vote only for seats representing that                 Regional Committee members will be
                                              working from a firm’s office in a                       firm’s size classification (small, mid-size           current District Committee members.
                                              particular district will result in                      or large). In addition, as with the other             FINRA intends to appoint the District
                                              committee member candidates that                        proposed composition and eligibility                  Committee members for terms
                                              better reflect the type of firms within the             changes, FINRA believes that the                      concurrent with the expiration of their
                                              respective regions, while ensuring that                 revised voting eligibility requirements               current terms. Thus, the District
                                              all districts have adequate                             and election process will reduce                      Committee members elected or
                                              representation within their respective                  potential impediments that could                      appointed in 2017 for full terms will
                                              Regional Committees. Committee                          hinder Regional Committee composition                 serve three-year terms, the District
                                              member candidates from firms                            from reflecting the industry within that              Committee members elected or
                                              headquartered in a district also often                  region. FINRA intends to monitor                      appointed in 2016 for full terms will
                                              bring regional and product expertise                    Regional Committee composition and                    serve two-year terms, and the District
                                              pertinent to that area.                                 will consider other changes, as                       Committee members elected or
                                                 FINRA proposes retaining the                         appropriate, if the proposed changes do               appointed in 2015 for full terms will
                                              requirement that a committee member                     not achieve the intended goal. The                    serve one-year terms. The purpose of the
                                              be registered in the capacity of a branch               proposed amendments retain the direct                 rolling terms is to preserve the current
                                              manager or principal or denoted as a                    candidate self-nomination and vacancy                 practice described below of providing
                                              corporate officer of the FINRA                          appointment process currently used for                that one-third of the committees’
                                              member.26 This requirement is designed                  District Committee elections.31                       positions will be available for election
                                              to ensure that committee members have                      As a transitional measure, and to                  each year.
                                              requisite experience for purposes of                    ensure that the Regional Committees
                                                                                                                                                            Regional Committee Term of Office and
                                              participating in meetings.27                            begin with a full complement of
                                                 In addition, the proposed                                                                                  Meeting Location and Frequency
                                                                                                      members, upon the proposed rule
                                              amendments retain district-level                        change becoming effective, FINRA                         The proposed amendments retain for
                                              elections for Regional Committee                        would appoint all current District                    Regional Committee members the
                                              members. As noted above, each district                  Committee members to serve on the                     District Committees’ three-year ‘‘full
                                              within its respective region will elect                 Regional Committees. As a result, the                 term’’ limit.35 Also, consistent with the
                                              six Regional Committee members.28                       Regional Committee members initially                  District Committees’ term of office
                                              Each firm headquartered in the district                 would include: (1) Any current District               provisions, the proposed rule change
                                              shall be eligible to cast one vote for each             Committee members from within each                    does not impose a limit on the number
                                              position to be filled on a district’s                   region who meet the proposed eligibility              of total terms that may be served, with
                                              election ballot with the candidate                      requirement that the member be                        the exception that a committee member
                                              receiving the largest number of votes                   associated with a firm headquartered in               may serve no more than two full terms
                                              cast by FINRA members eligible to vote                  the district the member is representing;              consecutively.36 The proposed rule
                                              in the district filling the vacant seat.29              and (2) the six current District                      change differs from the current
                                              The proposed amendments do not retain                   Committee members who do not meet                     provision that District Committee
                                              the current requirement that member                     the proposed eligibility requirement that             members may not serve two consecutive
                                              firms are only eligible to vote for                     they be associated with a member firm                 full terms. The proposed change is
                                              committee members based on the                          headquartered within the district they                based, in part, on a Special Notice
                                              applicable classification of the firm with              are representing. This transitional                   commenter’s suggestion that FINRA
                                              which the committee member                              measure will allow all current                        eliminate the prohibition against
                                              candidates are associated (e.g., only                   committee members to serve their full                 District Committee members serving
                                              large firms are currently eligible to vote              terms, consistent with the By-Laws,32                 two consecutive full terms.37 In
                                              for one of the three large-firm committee               and prevent them from being
                                              member candidates).30 Also, as noted                    disenfranchised as a result of the                      34 FINRA would appoint the initial Regional

                                              previously, firms with a branch office                  proposed rule change.33 If the number of              Committee members using its power to appoint
                                                                                                                                                            qualified persons to fill Regional Committee
                                              located in the district will no longer be               District Committee members is                         vacancies where there is no designated candidate.
                                                                                                      insufficient to fulfill all the Regional              See proposed FINRA Regulation By-Laws, Article
                                                25 See FINRA Regulation By-Laws, Article VIII,
                                                                                                      Committee seats, FINRA will appoint                   VIII, Section 8.8(b).
                                              Section 8.2(a)(1)–(2).                                                                                          35 See proposed FINRA Regulation By-Laws,
                                                26 See proposed FINRA Regulation By-Laws,
                                                                                                        31 See proposed FINRA Regulation By-Laws,           Article VIII, Section 8.3.
                                              Article VIII, Section 8.2(a)(1).                        Article VIII, Section 8.8.                              36 See supra note 35. The proposed rule change
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                                                27 See Securities Exchange Act Release No. 64002
                                                                                                        32 See FINRA Regulation By-Laws, Article VIII,      would not prohibit someone appointed or elected
                                              (March 2, 2011), 76 FR 12390 (March 7, 2011)            Section 8.2(a) (providing that no decrease in the     to the committee to serve a partial term from
                                              (Notice of Filing of File No. SR–FINRA–2011–011).       authorized number of members of a District            serving two consecutive terms in addition to the
                                                28 See proposed FINRA Regulation By-Laws,
                                                                                                      Committee shall shorten the term of office of any     partial term.
                                              Article VIII, Section 8.2(a).                           member).                                                37 Commonwealth. One Special Notice
                                                29 See proposed FINRA Regulation By-Laws,               33 Four of the committee members have one year      commenter suggested limiting District Committee
                                              Article VIII, Section 8.9 and Section 8.17.             remaining on their terms, while the other two         members to one term. See Elmcore Securities, LLC.
                                                30 See FINRA Regulation By-Laws, Article VIII,        committee members have two years remaining on         (noting also that she did not have enough input
                                              Section 8.9 and Section 8.17.                           their terms.                                          regarding the District Committees’ activities to



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                                                                            Federal Register / Vol. 83, No. 105 / Thursday, May 31, 2018 / Notices                                                     25065

                                              addition, as noted above, the proposed                  conforming changes to reflect the                       Regional Committee members are
                                              amendments continue the current                         proposed elimination of firm-size                       eligible to serve as disciplinary hearing
                                              District Committee practice of staggering               classifications and the committee                       panelists.44 FINRA also is exploring
                                              the three-year committee membership                     member candidate and member voting                      options to enlarge the pool of panelists
                                              terms to provide that one-third of each                 eligibility criteria that a firm have a                 and better educate the Regional
                                              Regional Committee’s positions be                       principal or branch office within a                     Committees about the critical function
                                              available for election each year.                       district) the administrative and                        of serving on hearing panels in FINRA
                                                 FINRA also proposes that the                         procedural provisions relating to                       disciplinary proceedings.
                                              Regional Committees retain the current                  meetings, vacancies, committee support,                    FINRA has filed the proposed rule
                                              requirement to meet on a regional                       expenses and compensation, self-                        change for immediate effectiveness and
                                              basis.38 In addition, the Regional                      nomination, ballots, candidate                          has requested that the SEC waive the
                                              Committees will meet in-person two                      solicitation, voter qualification list,                 requirement that the proposed rule
                                              times a year, consistent with the general               extensions of time, and definitions.41                  change not become operative for 30 days
                                              practice for District Committee meeting                                                                         after the date of the filing so FINRA can
                                              frequency.                                              Proposed Conforming Amendments
                                                                                                                                                              implement the proposed rule change
                                              Regional Committee Regulatory Role                         FINRA is proposing to amend Article                  immediately.
                                              and Purpose                                             I (Definitions) of the FINRA Regulation
                                                                                                      By-Laws to delete the term ‘‘District                   2. Statutory Basis
                                                FINRA proposes that the Regional                      Committee’’ and add the term ‘‘Regional                    FINRA believes that the proposed rule
                                              Committees assume the District                          Committee’’ 42 and make conforming                      change is consistent with the provisions
                                              Committees’ regulatory roles outlined in                amendments to the FINRA Regulation                      of Section 15A(b)(4) of the Act,45 which
                                              the FINRA Regulation By-Laws to:                        By-Laws to replace District Committee                   requires, among other things, that
                                                • Serve as panelists in disciplinary                  references with Regional Committee                      FINRA rules must be designed to assure
                                              proceedings in accordance with FINRA                    references. FINRA also proposes                         a fair representation of its members in
                                              rules;                                                  amending the FINRA 9000 Rule Series                     the selection of its directors and
                                                • consider and recommend policies
                                                                                                      (Code of Procedure) to replace, where                   administration of its affairs, and with
                                              and rule changes to the Board; and
                                                • endeavor to educate FINRA                           appropriate, the term ‘‘District                        Section 15A(b)(6) of the Act,46 which
                                              members and others as to the objects,                   Committee’’ with ‘‘Regional                             requires, among other things, that
                                              purposes and work of FINRA and                          Committee.’’ In addition, FINRA                         FINRA rules must be designed to
                                              FINRA Regulation.39                                     proposes amending FINRA Rule 9120                       prevent fraudulent and manipulative
                                                In addition, FINRA intends to have                    (Definitions) to clarify that the ‘‘District            acts and practices, to promote just and
                                              Regional Committee members be                           Committee’’ definition is referring to the              equitable principles of trade, and, in
                                              responsible for communicating high-                     District Committees that will be                        general, to protect investors and the
                                              level information regarding meeting                     replaced by the proposed Regional                       public interest. FINRA believes that the
                                              discussions to their constituents. This                 Committees, replace the term ‘‘Primary                  proposed rule change will result in a
                                              responsibility would be consistent with                 District Committee’’ with ‘‘Primary                     more effective Regional Committee
                                              the role noted above that the Regional                  Regional Committee,’’ and add the term                  structure that aligns with how FINRA
                                              Committees educate FINRA members                        ‘‘Regional Committee.’’ 43                              administratively groups and manages
                                              and others regarding FINRA and its                         FINRA also is proposing amendments                   the current District Committees. The
                                              work. The added responsibility also is                  to FINRA Rule 9231 (Appointment by                      proposed rule change also will continue
                                              consistent with a Special Notice                        the Chief Hearing Officer of Hearing                    to provide members with the
                                              commenter’s suggestion that District                    Panel or Extended Hearing Panel or                      opportunity to elect and serve as
                                              Committees be used to greater effect by                 Replacement Hearing Officer) and                        committee members. More specifically,
                                              helping educate FINRA about district                    FINRA Rule 9820 (Appointment of                         the proposed rule change will expand
                                              developments.40                                         Hearing Officer and Hearing Panel) to                   the voting opportunities for members
                                                                                                      clarify that former District Committee                  headquartered within a district by
                                              Regional Committee Administration and                   members and current and former                          providing them the opportunity to cast
                                              Procedures                                                                                                      a vote for every open seat rather than
                                                The staff proposes retaining without                     41 See generally proposed FINRA Regulation By-
                                                                                                                                                              requiring each member to vote only for
                                                                                                      Laws, Article VIII, Sections 8.2(b)–(d), 8.4 (Filling   seats representing that member’s size
                                              significant changes (other than                         of Vacancies on Regional Committees), 8.5
                                                                                                      (Meetings of Regional Committees), 8.6 (Expenses of     classification (small, mid-size or large).
                                              answer the Special Notice question asking about the     Regional Committees), 8.7 (Solicitation of              However, pursuant to the proposed rule
                                              District Committees’ usefulness). Another               Candidates and Secretary’s Notice to FINRA              change, members with a branch office
                                              commenter approved the current prohibition              Members), 8.8 (Self-Nomination of Candidates and
                                              against serving two consecutive full terms. See
                                                                                                                                                              located in the district will no longer be
                                                                                                      Vacancy Appointments), 8.10 (Administrative
                                              Midwest Region Committees; see also Lara, May           Support), 8.11 (Ballots), 8.12 (Vote Qualification      eligible to vote in the district-level
                                              (indicating, without further detail, support for the    List), 8.13 (Ballots Returned as Undelivered), 8.14     elections (unless a firm with a branch
                                              current three-year term and term limits). Both          (General Procedures for Qualification and               office in a particular district is also
                                              commenters supported their suggestions as a means       Accounting of Ballots), 8.15 (Ballots Set Aside),
                                              of providing more opportunities for interested
                                                                                                                                                              headquartered in that district). As
                                                                                                      8.16 (Invalid Ballots), 8.17 (Election Results), 8.18
                                              individuals to become committee members and             (Extensions of Time and Additional Procedures),         further detailed above, the
                                              provide input. However, as noted above, there has       8.19 (Definitions) and 9.1 (Compensation of Board,      representation of Regional Committee
                                              been a general lack of interest in committee service.   Council, and Committee Members).                        members will more closely reflect the
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                                              In addition, FINRA does not have any evidence              42 See proposed FINRA Regulation By-Laws,
                                              supporting the supposition that interest in
                                                                                                                                                              membership and industry configuration
                                                                                                      Article I(hh) (definition of ‘‘Regional Committee’’).
                                              committee service will increase by imposing term           43 See proposed amendments to FINRA Rule
                                                                                                                                                              within the respective regions.
                                              limitations.                                            9120(g) (adding the term ‘‘former’’ to the District
                                                 38 See proposed FINRA Regulation By-Laws,                                                                      44 The proposed rule change also updates the
                                                                                                      Committee definition) and FINRA Rule 9120(y)
                                              Article VIII, Section 8.5.                              (replacing the term ‘‘District’’ with ‘‘Regional’’ in   cross-reference to FINRA Rule 9231 in FINRA Rule
                                                 39 See proposed FINRA Regulation By-Laws,
                                                                                                      the ‘‘Primary District Committee’’ definition) and      9232(d) (Criteria for Appointment of a Panelist).
                                              Article VIII, Section 8.2(a).                           proposed FINRA Rule 9120(z) (‘‘Regional                   45 15 U.S.C. 78o–3(b)(4).
                                                 40 NSCP.                                             Committee’’).                                             46 15 U.S.C. 78o–3(b)(6).




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                                              25066                           Federal Register / Vol. 83, No. 105 / Thursday, May 31, 2018 / Notices

                                                 FINRA further believes that the                        C. Self-Regulatory Organization’s                     All submissions should refer to File
                                              proposed rule change is consistent with                   Statement on Comments on the                          Number SR–FINRA–2018–021. This file
                                              Section 15A(b)(8) of the Act,47 which                     Proposed Rule Change Received From                    number should be included on the
                                              requires, among other things, that                        Members, Participants, or Others                      subject line if email is used. To help the
                                              FINRA rules must be designed to                             Written comments were neither                       Commission process and review your
                                              provide a fair procedure for the                          solicited nor received on the proposed                comments more efficiently, please use
                                              disciplining of members and persons                       rule change. As noted above, in March                 only one method. The Commission will
                                              associated with members. The proposed                     2017, FINRA issued a Special Notice on                post all comments on the Commission’s
                                              rule change maintains the necessary                       engagement, which solicited comment                   internet website (http://www.sec.gov/
                                              eligibility requirements to ensure that                   regarding FINRA’s engagement                          rules/sro.shtml). Copies of the
                                                                                                        programs, including the District                      submission, all subsequent
                                              the pool of potential panelists is
                                                                                                        Committees generally, and, in response,               amendments, all written statements
                                              composed of qualified members. In                                                                               with respect to the proposed rule
                                              addition, by reducing the number of                       several commenters discussed the
                                                                                                                                                              change that are filed with the
                                              committee members in the West and                         District Committees.48
                                                                                                                                                              Commission, and all written
                                              South Regions from 21 to 18 and in the                    III. Date of Effectiveness of the                     communications relating to the
                                              Midwest, North, and New York Regions                      Proposed Rule Change and Timing for                   proposed rule change between the
                                              from 14 to 12, the proposed rule change                   Commission Action                                     Commission and any person, other than
                                              only reduces by 12 the maximum                                                                                  those that may be withheld from the
                                                                                                           Because the foregoing proposed rule
                                              number of eligible panelists who would                    change does not: (i) Significantly affect             public in accordance with the
                                              be current committee members. FINRA                       the protection of investors or the public             provisions of 5 U.S.C. 552, will be
                                              is exploring options to enlarge the pool                  interest; (ii) impose any significant                 available for website viewing and
                                              of panelists and better educate the                       burden on competition; and (iii) become               printing in the Commission’s Public
                                              Regional Committees about the critical                    operative for 30 days from the date on                Reference Room, 100 F Street NE,
                                              function of serving on hearing panels in                  which it was filed, or such shorter time              Washington, DC 20549 on official
                                              FINRA disciplinary proceedings.                           as the Commission may designate, it has               business days between the hours of
                                                                                                        become effective pursuant to Section                  10:00 a.m. and 3:00 p.m. Copies of such
                                              B. Self-Regulatory Organization’s                                                                               filing also will be available for
                                              Statement on Burden on Competition                        19(b)(3)(A) of the Act 49 and Rule 19b–
                                                                                                        4(f)(6) thereunder.50                                 inspection and copying at the principal
                                                                                                           At any time within 60 days of the                  office of FINRA. All comments received
                                                FINRA does not believe that the                                                                               will be posted without change. Persons
                                              proposed rule change will result in any                   filing of the proposed rule change, the
                                                                                                        Commission summarily may                              submitting comments are cautioned that
                                              burden on competition that is not                                                                               we do not redact or edit personal
                                              necessary or appropriate in furtherance                   temporarily suspend such rule change if
                                                                                                        it appears to the Commission that such                identifying information from comment
                                              of the purposes of the Act. The                                                                                 submissions. You should submit only
                                              proposed rule change will not impose                      action is necessary or appropriate in the
                                                                                                        public interest, for the protection of                information that you wish to make
                                              any direct costs or additional regulatory                                                                       available publicly. All submissions
                                                                                                        investors, or otherwise in furtherance of
                                              obligations on members. FINRA will                                                                              should refer to File Number SR–FINRA–
                                                                                                        the purposes of the Act. If the
                                              continue its practice of covering                         Commission takes such action, the                     2018–021, and should be submitted on
                                              committee meeting costs and expenses                      Commission shall institute proceedings                or before June 21, 2018.
                                              committee members incur by attending                      to determine whether the proposed rule                  For the Commission, by the Division of
                                              meetings in person.                                       should be approved or disapproved.                    Trading and Markets, pursuant to delegated
                                                                                                                                                              authority.51
                                                The proposed rule change will reduce
                                                                                                        IV. Solicitation of Comments                          Eduardo A. Aleman,
                                              representation within each Regional
                                              Committee from seven seats to six seats                     Interested persons are invited to                   Assistant Secretary.
                                              per district. However, FINRA does not                     submit written data, views, and                       [FR Doc. 2018–11728 Filed 5–30–18; 8:45 am]
                                              believe that it reduces overall                           arguments concerning the foregoing,                   BILLING CODE 8011–01–P

                                              opportunities for members to interact                     including whether the proposed rule
                                              with FINRA staff or serve on                              change is consistent with the Act.
                                                                                                        Comments may be submitted by any of                   SECURITIES AND EXCHANGE
                                              committees. As noted in Special Notice,
                                                                                                        the following methods:                                COMMISSION
                                              FINRA has over 30 advisory and ad hoc
                                              committees that include member                            Electronic Comments                                   Submission for OMB Review;
                                              representatives who routinely provide                       • Use the Commission’s internet                     Comment Request
                                              input and feedback on regulatory                          comment form (http://www.sec.gov/                     Upon Written Request Copies Available
                                              initiatives, proposed rule changes, and                   rules/sro.shtml); or                                   From: U.S. Securities and Exchange
                                              emerging regulatory issues. FINRA                           • Send an email to rule-comments@                    Commission, Office of FOIA Services,
                                              regularly engages with the industry                       sec.gov. Please include File Number SR–                100 F Street NE, Washington, DC
                                              through its public comment process on                     FINRA–2018–021 on the subject line.                    20549–2736.
                                              proposed rule changes. In addition,                       Paper Comments                                        Extension:
                                              FINRA conducts member outreach
                                                                                                          • Send paper comments in triplicate                   OWMI Contract Standard for Contractor
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                                              through a number of regularly                                                                                       Workforce Inclusion; SEC File No.270–
                                              scheduled events, including member                        to Secretary, Securities and Exchange
                                                                                                                                                                  666, OMB Control No. 3235–0725
                                              meetings, round tables, district                          Commission, 100 F Street NE,
                                                                                                        Washington, DC 20549–1090.                              Notice is hereby given that, pursuant
                                              compliance meetings, and conferences.                                                                           to the Paperwork Reduction Act of 1995
                                                                                                         48 See supra notes 5 and 6.                          (44 U.S.C. 3501 et seq.), the Securities
                                                                                                         49 15 U.S.C. 78s(b)(3)(A).
                                                47 15   U.S.C. 78o–3(b)(8).                              50 17 CFR 240.19b–4(f)(6).                             51 17   CFR 200.30–3(a)(12).



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Document Created: 2018-05-31 00:48:16
Document Modified: 2018-05-31 00:48:16
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation83 FR 25062 

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