[Federal Register Volume 75, Number 140 (Thursday, July 22, 2010)]
[Notices]
[Pages 42795-42797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-17931]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62521; File No. SR-FINRA-2010-006]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule
Change and Order Granting Accelerated Approval to a Proposed Rule
Change, as Modified by Amendment No. 1, To Amend the Codes of
Arbitration Procedure To Provide for Attorney Representation of Non-
Party Witnesses in Arbitration
July 16, 2010.
I. Introduction
On January 22, 2010, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') (f/k/a National Association of Securities Dealers,
Inc. (``NASD'')) filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder, \2\ a proposed rule change to amend Rule 12602 of the Code
of Arbitration Procedure for Customer Disputes (``Customer Code'') and
Rule 13602 of the Code of Arbitration Procedure for Industry Disputes
(``Industry Code'') (collectively, the ``Codes'') to provide that a
non-party witness may be represented by an attorney at an arbitration
hearing while the witness is testifying. The proposed rule change was
published for comment in the Federal Register on February 23, 2010.\3\
The Commission received three comments in response to the proposed rule
change.\4\ FINRA responded to the comments and on June 14, 2010 filed
Amendment No. 1 to the proposed rule change.\5\ The Commission is
publishing this notice and order to solicit comments on Amendment No. 1
and to approve the proposed rule change, as modified by Amendment No.
1, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 61517 (February 16,
2010), 75 FR 8169 (February 23, 2010), (SR-FINRA-2010-006)
(``Notice'').
\4\ See letter from William A. Jacobson, Director, Cornell
Securities Law Clinic and Rubina Ali, Cornell Law School, dated
March 16, 2010 (``Cornell Letter''), letter from Richard P. Ryder,
dated April 16, 2010 (``Ryder Letter'') and letter from Scott R.
Shewan, President, Public Investors Arbitration Bar Association,
dated April 28, 2010 (``PIABA Letter''). The Ryder Letter and the
PIABA Letter were submitted several weeks after the expiration of
the comment period.
\5\ See Amendment No. 1 dated June 14, 2010 (``Amendment No.
1''). The text of Amendment No. 1 is available on FINRA's Web site
at http:www.finra.org, at the principal office of FINRA, and on the
Commission's Internet Web site ( http://www.sec.gov.rules.sro.html).
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II. Description of the Proposed Rule Change
FINRA proposed to amend Rules 12602 and 13602 of the Codes to
provide that a non-party witness has the right to be represented by an
attorney at an arbitration proceeding held in a United States hearing
location while the witness is testifying. The attorney would have to be
in good standing and admitted to practice before the Supreme Court of
the United States or the highest court of any state of the United
States, the District of Columbia, or any commonwealth, territory, or
possession of the United States, unless state law prohibits such
representation. Under the proposal, the panel would have the authority
to determine the extent to which the attorney could participate at the
hearing.
While the Codes expressly allow a party in an arbitration
proceeding to be represented by an attorney at any stage in the
proceeding,\6\ they do not address attorney representation of a non-
party witness. As stated in the notice, FINRA
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believes that a non-party witness should be entitled to representation
by an attorney while he or she is testifying. Currently, under the
Codes, the arbitration panel determines whether a non-party witness'
attorney may attend a hearing.\7\ A non-party witness may testify at a
hearing: (1) Voluntarily; (2) pursuant to a subpoena; \8\ or (3) in
compliance with an arbitrator's order for an associated person to
appear and give testimony.\9\
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\6\ Rules 12208 and 13208 of the Codes (Representation of
Parties) provide that parties have the right to be represented by an
attorney at any stage in an arbitration proceeding. They also allow
parties to be represented by a person who is not an attorney subject
to certain limitations.
\7\ Rules 12602 and 13602 of the Codes (Attendance at Hearings)
provide that parties and their representatives are entitled to
attend all hearings and that, absent persuasive reasons to the
contrary, expert witnesses should also be permitted to attend all
hearings. The panel determines who else may attend any or all
hearings.
\8\ Rules 12512 and 13512 of the Codes (Subpoenas) provide that
arbitrators have the authority to issue subpoenas for the production
of documents or the appearance of witnesses. The rules permit a
party to make a written motion requesting that an arbitrator issue a
subpoena to a party or a non-party.
\9\ Rules 12513 and 13513 of the Codes (Authority of Panel to
Direct Appearances of Associated Person Witnesses and Production of
Documents Without Subpoenas) provide that the panel may order the
appearance of any employee or associated person of a FINRA member.
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Under the current Codes, arbitrators determine whether non-party
witnesses can bring an attorney to a hearing. As indicated in the
Notice, FINRA does not believe that arbitrators have been denying
requests by non-party witnesses, including non-party associated
persons,\10\ to be represented by attorneys while testifying;
nevertheless, to assure due process in its dispute resolution forum,
FINRA believes that the Codes should expressly provide that a non-party
witness is entitled to be represented by an attorney while testifying.
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\10\ The proposed rule change would apply to all non-party
witnesses testifying at a FINRA arbitration hearing, including an
associated person who handled the customer claimant's account but
was not named as a respondent in the case.
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III. Summary of Comment Letters and FINRA's Response
The Commission received three comments on the proposed rule
change.\11\ Two commenters suggested revisions to the proposed rule
change.\12\ The other commenter generally opposed the proposal and
urged FINRA to withdraw it.\13\ The Commission also received FINRA's
response to comments, which is discussed below.\14\
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\11\ See note 4, supra.
\12\ Cornell Letter; PIABA Letter. The Cornell Letter expressed
support for the proposed rule change subject to modification. The
PIABA Letter indicated that it did not support the proposed rule in
its current form.
\13\ Ryder Letter.
\14\ Letter from Margo A. Hassan, FINRA, dated April 1, 2010
(addressing the Cornell Letter) (``FINRA Letter I''). Because the
Ryder and PIABA Letters were submitted after the expiration of the
comment period, FINRA responded to these comments in a separate
letter. See letter from Margo Hassan, FINRA, dated June 14, 2010
(``FINRA Letter II'') (collectively with FINRA Letter I, ``FINRA's
Response'').
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One commenter supported FINRA's efforts to consider due process
protections for non-party witnesses.\15\ However, the commenter also
expressed concern that unless FINRA adopts guidelines for arbitrators,
the arbitration process could be impeded by attorneys for non-party
witnesses using scheduling conflicts to delay an arbitration or
``overstepping'' their role with inappropriate objections not
necessarily tied to their clients' testimony. This commenter suggested
amending the proposal to limit the role of a non-party witness'
attorney, absent extraordinary circumstances, to matters concerning
privilege and conflicts arising under Fifth Amendment protections
against self-incrimination.\16\
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\15\ Cornell Letter.
\16\ Id. The commenter also indicated that attorneys for non-
party witnesses should not be able to participate generally in the
proceedings or cross-examine witnesses.
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Another commenter did not support the proposal and suggested an
amending it to limit the role of a non-party witness' attorney.\17\
Specifically, this commenter suggested that attorneys for non-party
witnesses should not be permitted to participate in an arbitration
hearing or advocate on behalf of any particular party (e.g.,
interjecting argument in the case or offering input or assistance to
counsel for any other party) other than to raise an objection on behalf
of a non-party witnesses based on privileges that have been well-
accepted at the federal and state court level.\18\
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\17\ PIABA Letter
\18\ The commenter listed the following non-exclusive privileges
from state and federal courts: attorney-client privilege, work
product doctrine, spousal privilege, clergy privilege and
accountant-client privilege. See PIABA Letter.
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The third commenter did not support the proposal stating that: (1)
The proposal is unnecessary because arbitrators have apparently not
been denying requests for representation from non-party witnesses; (2)
FINRA's references to ``due process'' are inappropriate because
arbitration proceedings are not designed to be structured as judicial
proceedings; (3) the proposal would reduce control by arbitrators, add
confusion and protract the process (e.g., by adding time for developing
bar qualifications for eligibility of counsel to participate in each
respective arbitration forum); and (4) FINRA has not adequately
justified its basis for the proposal.\19\
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\19\ Ryder Letter.
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FINRA submitted Amendment No. 1 in response to comments.\20\
Amendment No. 1 generally provides that unless otherwise authorized by
the arbitration panel, the role of the attorney for a non-party witness
would be limited to asserting recognized privileges such as the
attorney-client and work product privileges and the privilege against
self-incrimination.\21\ FINRA indicated that Amendment No. 1 would
provide additional guidance to parties and arbitrators about the role
of a non-party witnesses' attorney while maintaining an arbitrator's
authority and ability to determine the appropriate level of attorney
representation at a hearing.\22\ FINRA reiterated that it continually
reviews the Codes to enhance its case administration processes and
ensure that its forum is fair to all participants.\23\ In addition,
FINRA indicated that it strives to improve the Codes before problems
arise and to this end the proposal would close a gap in the Codes
relating to non-party witness representation.
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\20\ FINRA Letter II.
\21\ Id.
\22\ FINRA's Response.
\23\ Id.
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IV. Discussion and Commission Findings
After carefully considering the proposal, as amended by Amendment
No. 1, the comments, and FINRA's Response, the Commission finds that
the proposed rule change is consistent with the requirements of the
Act, and the rules and regulations thereunder that are applicable to a
national securities association.\24\ In particular, the Commission
believes the proposed rule change is consistent with the provisions of
Section 15A(b)(6) of the Act,\25\ 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. The proposed rule change is consistent with FINRA's
statutory obligations under the Act to protect investors and the public
interest because it would enhance the fairness in the arbitration
process by clarifying that a non-party witness may be represented by
counsel during his or her testimony.
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\24\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 17c(f).
\25\ 15 U.S.C. 78o-3(b)(6).
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The Commission believes that FINRA has adequately addressed the
concerns raised by the commenters. With respect
[[Page 42797]]
to the concern that the proposal is unnecessary because abuses have not
been witnessed, the Commission notes that its oversight of the
securities arbitration process is directed at ensuring that it is fair
and efficient. The Commission believes that FINRA's proactive approach
in proposing this rule change is consistent with ensuring a fair and
efficient arbitration process for all persons involved in arbitration,
including non-party witnesses.
Moreover, the Commission believes the concern that the proposal
would reduce control by arbitrators, add confusion and protract the
process will be mitigated by Amendment No. 1. Under the proposal, as
modified by Amendment No. 1, the role of attorneys for non-party
witnesses will generally be limited to asserting recognized privileges
on behalf of the non-party witness; however, the arbitration panel will
maintain overall control over the proceeding, including the ability to
determine the appropriate level of attorney representation at a
hearing. Further, FINRA has committed to alerting arbitrators to
concerns regarding delayed or protracted proceedings.
Finally, the Commission does not agree that FINRA has not
adequately justified its basis for the proposal. The Commission
believes that FINRA's justification of enhancing fairness in the
arbitration process by ensuring that a non-party witness may be
represented by counsel during his or her testimony is consistent with
the requirements of the Act.
V. Accelerated Approval
The Commission finds goods cause, pursuant to Section 19(b)(2) of
the Act,\26\ for approving the proposed rule change, as modified by
Amendment No. 1 thereto, prior to the 30th day after publication of
Amendment No.1 in the Federal Register. The changes proposed in
Amendment No.1 respond to specific concerns raised by commenters. In
particular, Amendment No. 1 proposes to limit the role of a non-party
witness attorney, unless otherwise authorized by the arbitration panel,
to the assertion of recognized privileges such as the attorney-client
and work product privilege and the privilege against self-
incrimination.
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\26\ 15 U.S.C. 78s(b)(2).
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Accordingly, the Commission finds that good cause exists to approve
the proposal, as modified by Amendment No. 1, on an accelerated basis.
VI. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether Amendment No. 1
to 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 e-mail to [email protected]. Please include
File Number SR-FINRA-2010-006 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-2010-006. 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-2010-006
and should be submitted on or before August 12, 2010.
VII. Conclusions
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\27\ that the proposed rule change (SR-FINRA-2010-006), as modified
by Amendment No. 1, be, and hereby is, approved on an accelerated
basis.
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\27\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-17931 Filed 7-21-10; 8:45 am]
BILLING CODE 8010-01-P