[Federal Register Volume 75, Number 101 (Wednesday, May 26, 2010)]
[Notices]
[Pages 29594-29596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-12625]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62134; File No. SR-FINRA-2010-022]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to
Amending the Codes of Arbitration Procedure to Increase the Number of
Arbitrators on Lists Generated by the Neutral List Selection System
May 19, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 194 thereunder,\2\ notice is hereby given that
on April 29, 2010, the 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 substantially prepared by
FINRA. 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.
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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 Rules 12403 and 12404 of the Code of
Arbitration Procedure for Customer Disputes (``Customer Code'') and
Rules 13403 and 13404 of the Code of Arbitration Procedure for Industry
Disputes (``Industry Code'') to increase the number of arbitrators on
each list generated by the Neutral List Selection System (``NLSS'').
The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The NLSS is a computer system that generates, on a random basis,
lists of arbitrators from FINRA's rosters of arbitrators (i.e., public,
non-public, and chair rosters) for each arbitration case. The parties
select their panel through a process of striking and ranking the
arbitrators on the lists.
Currently, parties are sent lists of available arbitrators, along
with detailed biographical information on each arbitrator. In a three-
arbitrator case, other than one involving a dispute among members, the
parties receive three lists of eight arbitrators each--one public, one
chair-qualified and one non-public. Each party is permitted to strike
up to four of the eight names on each list and ranks the remaining
names in order of preference. FINRA appoints the panel from among the
names remaining on the lists that the parties return.\3\
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\3\ In an arbitration between members, the panel consists of
non-public arbitrators, and so the parties receive a list of 16
arbitrators from the FINRA non-public roster, and a list of eight
non-public arbitrators from the FINRA non-public chairperson roster.
See FINRA Rules 13402 and 13403. Each separately represented party
may strike up to eight of the arbitrators from the non-public list
and up to four of the arbitrators from the non-public chairperson
list. See FINRA Rule 13404.
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When there are no names remaining on a list, or when a mutually
acceptable arbitrator is unable to serve, a random
[[Page 29595]]
selection is made to ``extend the list'' by generating names of
additional arbitrators to complete the panel. Parties may not strike
the arbitrators on the extended lists, but they may challenge an
arbitrator for cause (e.g., on the basis of conflict of interest).
Prior to 2007, FINRA permitted parties unlimited strikes of
proposed arbitrators on lists. This often resulted in parties
collectively striking all of the arbitrators on each list generated
through NLSS. When this occurred, staff would use NLSS to ``extend the
list'' by generating names of additional arbitrators to complete the
panel.
Parties expressed concern about extended list arbitrator
appointments because they could not strike arbitrators from an extended
list. In response to this concern, in 2007, FINRA changed the
arbitrator appointment process through a rule change that limited the
number of strikes each party may exercise to four, in an effort to
reduce the frequency of extended list appointments.\4\ Under the
current rule, FINRA permits each party to strike up to four arbitrators
from each list of eight arbitrators generated through NLSS and up to
eight arbitrators from each list of 16 arbitrators generated through
NLSS. The rules limiting strikes have significantly reduced extended
lists and thus increased the percentage of cases in which FINRA
initially appoints arbitrators from the parties' ranking lists.
However, after each side exercises its strikes, typically only one or
two persons remain eligible to serve on the case. Therefore, when FINRA
grants a challenge for cause or an arbitrator withdraws, FINRA often
must appoint the replacement arbitrator using an extended list. Forum
users, including both investor and industry parties, continue to
express concerns about extended list appointments.\5\
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\4\ Exchange Act Release No. 55158 (January 24, 2007), 72 FR
4574 (January 31, 2007) (File No. SR-NASD-2003-158).
\5\ The rationale for the proposed rule change was confirmed in
a phone conversation between Margo Hassan, FINRA Dispute Resolution,
and Joanne Rutkowski, Division of Trading and Markets, Commission,
May 18, 2010.
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As a result of these concerns, FINRA is proposing to amend Rule
12403 of the Customer Code to expand the number of arbitrators on each
list (public, non-public, and public chairperson) generated through
NLSS from eight arbitrators to 10 arbitrators. Thus, in every two party
case, at least two arbitrators would remain on each list after
strikes.\6\ The additional number of arbitrators will increase the
likelihood that the parties will get panelists they chose and ranked,
even when FINRA must appoint a replacement arbitrator. In cases with
more than two parties, expanding the lists from eight to 10 arbitrators
should significantly reduce the number of arbitrator appointments
needed from extended lists.\7\
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\6\ FINRA is not proposing to expand the number of allowable
strikes for each party.
\7\ Under the rules, each separately represented party is
entitled to strike four arbitrators from an eight arbitrator list.
If, for example, a case involves a customer, a member and an
associated person, and each party is separately represented, even
with 10 arbitrators there is a chance that all of the arbitrators
will be stricken from the list.
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FINRA is also proposing to amend Rule 13403 of the Industry Code to
expand the number of arbitrators on lists generated through NLSS.\8\
For disputes between members, FINRA would expand the number of
arbitrators on the non-public chairperson list generated through NLSS
from eight arbitrators to 10 arbitrators and the number of arbitrators
on the non-public list from 16 arbitrators to 20 arbitrators. For
disputes between associated persons, or between or among members and
associated persons, FINRA would expand the number of arbitrators on
each list (public, non-public, and public chairperson) generated
through NLSS from eight arbitrators to 10 arbitrators.
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\8\ Again, FINRA is not proposing to expand the number of
allowable strikes for each party.
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FINRA considered whether increasing each list of arbitrators would
be unduly burdensome for parties since parties would be reviewing the
backgrounds of additional arbitrators during the ranking and striking
stage of the arbitrator appointment process. In instances where FINRA
appoints arbitrators by extended lists, parties still need to review
arbitrators' backgrounds to determine, for example, whether to
challenge an extended list arbitrator for cause.
FINRA staff discussed expanding the lists with both investor and
industry representatives, and asked the representatives to address the
potential burden of reviewing additional arbitrators. The
representatives uniformly stated that they would prefer to review
additional arbitrators at the ranking and striking stage of the
arbitrator appointment process in order to reduce the incidences of
extended list appointments.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\9\ 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. Forum users have criticized extended list appointments
and asked FINRA to reduce the number of arbitrators appointed in this
way. Expanding the number of arbitrators on lists generated through
NLSS would reduce extended list appointments and would provide parties
with more control in the arbitrator selection process because of the
increased likelihood that arbitrators from each initial list would
remain on the list after the parties complete the striking and ranking
process. The proposal would enhance investor and industry participants'
satisfaction with the arbitration process.
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\9\ 15 U.S.C. 78o-3(b)(6).
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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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be 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
[[Page 29596]]
Send an e-mail to [email protected]. Please include
File Number SR-FINRA-2010-022 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2010-022. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 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; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-FINRA-2010-022
and should be submitted on or before June 16, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-12625 Filed 5-25-10; 8:45 am]
BILLING CODE 8010-01-P