The Securities and Exchange Commission (SEC) recently approved amendments to the Financial Industry Regulatory authority (FINRA) rules that lower the evidentiary standard to impose a temporary cease and desist order (TCDO); create a new expedited proceeding for repeated failures to comply with a TCDO or a permanent cease and desist order (PCDO); harmonize the provisions governing how documents are served in temporary cease and desist and expedited proceedings; clarify FINRA’s authority to impose a PCDO; and ease FINRA’s administrative burden in temporary cease and desist proceedings. The amendments become effective on November 2, 2015.
Pursuant to the FINRA Rule 9800 Series, FINRA is authorized to seek and impose a TCDO in connection with the violation of specified rules. A TCDO can be imposed by a FINRA hearing panel where the potential harm resulting from violations to investors is likely and significant. It is designed to stop serious violative conduct and maintain the status quo while an underlying disciplinary proceeding is being litigated. FINRA’s TCDO authority is a critical investor-protection tool. Relatedly, FINRA Rule 9556 permits FINRA to bring an expedited proceeding against a firm, associated person or person subject to FINRA’s jurisdiction who fails to comply with a TCDO or a PCDO.
The SEC recently approved amendments to FINRA rules that will strengthen FINRA’s ability to use its TCDO and expedited-proceedings authority to better protect investors. In particular, the approved rule changes lower the evidentiary standard to obtain a TCDO; equip FINRA with stronger authority to sanction a firm, associated person or person subject to FINRA’s jurisdiction who repeatedly violates a TCDO or PCDO; reduce FINRA’s administrative burdens in processing temporary cease and desist proceedings, including expanding the pool of persons who are eligible to serve on hearing panels; and clarify FINRA’s authority to impose PCDOs. The rule amendments also harmonize the provisions governing service of documents and permit email service in temporary cease and desist and expedited proceedings.
TCDO Evidentiary Standard
Prior to the approved rule change, FINRA Rule 9840(a)(1) provided that a TCDO will be imposed if the hearing panel finds “by a preponderance of the evidence that the alleged violation… has occurred.” To increase the effectiveness of FINRA’s temporary cease and desist authority and improve its capacity to protect investors facing the likelihood of significant dissipation or conversion of assets, FINRA amended FINRA Rule 9840(a)(1) by lowering the evidentiary standard for obtaining a TCDO to “a showing of a likelihood of success on the merits.” This change will enable FINRA to initiate and resolve temporary cease and desist proceedings sooner and more efficiently, which will better protect investors’ assets and prevent other significant harm until the concurrent disciplinary proceeding is held.
Pursuant to FINRA Rule 9556, if a firm, associated person or person subject to FINRA’s jurisdiction fails to comply with a TCDO or a PCDO, FINRA staff (with prior written authorization from FINRA’s chief executive officer or such other senior officer as the chief executive officer may designate) may issue a notice to the firm or person stating that the failure to comply within seven days will result in a suspension or cancellation of membership or a suspension or bar from associating with any firm, and also stating what the firm or person must do to avoid such action. Prior to the approved rule change, a respondent could potentially abuse this procedure by repeatedly violating a TCDO or a PCDO and then curing that violation before the effective date of the Rule 9556 notice, without being subject to immediate sanctions.
To address FINRA’s concerns with such “violate and cure” situations, FINRA has created a new expedited proceeding. Under new FINRA Rule 9556(h), if a firm, associated person or person subject to FINRA’s jurisdiction fails to comply with a TCDO or a PCDO and has previously been served under FINRA Rule 9556(a) with a notice for a failure to comply with any provision of the same TCDO or PCDO, FINRA staff (with prior written authorization from FINRA’s chief executive officer or such other senior officer as the chief executive officer may designate) may file a petition with the Office of Hearing Officers seeking a hearing and the imposition of any fitting sanctions. In contrast with FINRA Rule 9556(a) proceedings, full compliance with the TCDO or PCDO is not a ground for dismissing a FINRA Rule 9556(h) proceeding.
Click here to read the entire Regulatory Notice 15-35.