[Federal Register Volume 75, Number 218 (Friday, November 12, 2010)]
[Notices]
[Pages 69481-69484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-28419]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63250; File No. SR-FINRA-2010-053]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to
Amendments to the Panel Composition Rule, and Related Rules, of the
Code of Arbitration Procedure for Customer Disputes
November 5, 2010.
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 October 25, 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 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 the panel composition rule, and related
rules, of the Code of Arbitration Procedure for Customer Disputes
(``Customer Code''), to provide customers with the option to choose an
all public arbitration panel in all cases.
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
Background
Under FINRA Dispute Resolution rules, parties in arbitration
participate in selecting the arbitrators who serve on their cases. For
customer claims of more than $100,000, the Customer Code currently
provides for a three arbitrator panel \3\ comprised of a chair-
qualified public arbitrator, \4\ a public arbitrator, \5\ and a non-
public arbitrator.\6\ FINRA uses the computerized Neutral List
Selection System (``NLSS'') to generate random lists of 10 arbitrators
from each of these categories. The parties select their panel through a
process of striking and ranking the arbitrators on the lists generated
by NLSS. The Customer Code permits the parties to strike the names of
up to four arbitrators from each list. The parties then rank the
arbitrators remaining on the lists in order of preference. FINRA
appoints the panel from among the names remaining on the lists that the
parties return.
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\3\ Rule 12401 provides for a single, chair-qualified public
arbitrator if the amount of the claim is not more than $100,000. It
provides for a three arbitrator panel if the amount of a claim is
more than $100,000, or is unspecified, or if the claim requests non-
monetary damages. The parties, in claims of more than $25,000, but
not more than $100,000, may agree in writing to have a three
arbitrator panel.
\4\ Rule 12400(c) specifies the criteria for arbitrator
inclusion on the chairperson roster.
\5\ Rule 12100(u) specifies the criteria FINRA uses to classify
arbitrators as public.
\6\ Rule 12100(p) specifies the criteria FINRA uses to classify
arbitrators as non-public.
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FINRA is proposing to amend the Customer Code to provide customers
with the option to choose between two panel selection methods--the
current panel selection method, which would be labeled ``Composition
Rules for Majority Public Panel'' (``Majority Public Panel''), and a
new panel selection method, which would be labeled ``Composition Rules
for Optional All Public Panel'' (``Optional All Public Panel''). Under
the proposed rule change, customers could choose the panel selection
method; neither firms nor associated persons could choose the selection
method.
The Majority Public Panel option would continue to provide for a
panel of one chair-qualified public arbitrator, one public arbitrator,
and one non-public arbitrator, and would retain the current limit of
four strikes for each arbitrator list. The new Optional All Public
Panel provision, if chosen by the customer, would allow parties to
select
[[Page 69482]]
an all public arbitration panel. Under this new provision, FINRA would
send the parties the same three lists of randomly generated arbitrators
that they would have received under the Majority Public Panel option,
but FINRA would allow each party to strike any or all of the
arbitrators on the non-public arbitrator list. If individually, or
collectively, the parties struck all of the non-public arbitrators,
FINRA would complete the panel by appointing a public arbitrator. Thus,
by striking all the arbitrators on the non-public list, any party could
ensure that the panel would have three public arbitrators.
The proposed rule change would apply only to customer disputes. It
would not apply to arbitrator selection in disputes involving only
industry parties. FINRA believes giving customers the option of an all
public panel will enhance confidence in and increase the perception of
fairness in the FINRA arbitration process. All customers will have
greater freedom in choosing arbitration panels, and any customer will
have the power to have his or her case heard by a panel with no
industry participants.
FINRA's Public Arbitrator Pilot Program
Customer advocates argue that the mandatory inclusion of a non-
public arbitrator (often referred to as the ``industry'' arbitrator) in
a three arbitrator case raises a perception that FINRA Dispute
Resolution's current forum is not fair to customers. In order to
address this perception, FINRA launched a pilot program (``the Pilot'')
that allows parties to choose a panel of three public arbitrators
instead of two public arbitrators and one non-public arbitrator.
FINRA designed the Pilot to run for two sequential years, beginning
October 6, 2008, and ending October 5, 2010. In Year One, 11 brokerage
firms volunteered to participate in the Pilot, each contributing a set
number of cases to the Pilot per year for two years. In Year Two, FINRA
expanded the number of participating brokerage firms to 14 firms. In
addition, several of the original participants increased their
respective case commitments for Year Two. Participating firms agreed to
extend the Pilot for a third year at the same case levels while the
rule making process proceeds. Year Three of the Pilot began October 6,
2010, and ends October 5, 2011, or upon implementation of the proposed
rule change, whichever comes first.
Under the Pilot, FINRA only permits a customer bringing the
arbitration claim to decide whether his or her case should proceed
under Pilot rules; the participating firms cannot select the Pilot
cases. The parties receive the same three lists of proposed arbitrators
that parties in non-Pilot cases receive. The difference is that, in the
Pilot cases, any party can strike any or all of the arbitrators on the
non-public list (as opposed to the four-strike limit for each party).
If the parties rank one or more of the non-public arbitrators, FINRA
appoints the highest ranked non-public arbitrator to the panel. If the
parties strike all of the non-public arbitrators or if they are unable
to serve, FINRA returns to the public arbitrator lists (the public list
first, followed by the chair-qualified public list) to complete the
panel. If no public arbitrators remain on the lists, FINRA uses NLSS to
appoint randomly an additional public arbitrator. Thus, by striking all
proposed non-public arbitrators, any party can choose a panel of three
public arbitrators.
Reactions from participants in the Pilot indicate that customer
representatives strongly support the right of customers to decide
whether to select any non-public arbitrator. That feedback has led
FINRA to propose amending the panel composition rule for customer cases
to allow the customer party to choose between the current panel
selection method and the method used in the Pilot. Unlike the Pilot,
however, the proposed rule would apply to all customer disputes against
any firm and any individual broker.
Details of the Proposed Rule Change
Currently, Rule 12402 (Composition of Arbitration Panels) specifies
the panel composition for all customer cases.\7\ Rules 12403
(Generating and Sending Lists to the Parties),\8\ 12404 (Striking and
Ranking Arbitrators),\9\ 12405 (Combining Lists),\10\ 12406
(Appointment of Arbitrators; Discretion to Appoint Arbitrators Not on
List),\11\ and 12411 (Replacement of Arbitrators) enumerate the
procedures for selecting, appointing, and replacing arbitrators.\12\
FINRA is proposing to consolidate these rules into two new rules: New
Rule 12402 relating to customer cases with one arbitrator, and new Rule
12403 relating to customer cases with three arbitrators. New Rule 12402
would describe the procedures for selecting, appointing, and replacing
the arbitrator in a single arbitrator case. New Rule 12403 would
describe the two options that customers have for selecting arbitrators
and would include the procedures for appointing and replacing
arbitrators. The proposed rule change would apply to all customer
cases.
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\7\ Rule 12402 provides that a single arbitrator panel will
consist of a chair-qualified public arbitrator, and that a three
arbitrator panel will consist of a chair-qualified public
arbitrator, a public arbitrator, and a non-public arbitrator.
\8\ Rule 12403 provides that if a panel consists of one
arbitrator, NLSS will generate a list of 10 chair-qualified public
arbitrators. If a panel consists of three arbitrators, NLSS will
generate a list of 10 chair-qualified public arbitrators, 10 public
arbitrators, and 10 non-public arbitrators. Under the rule, NLSS
excludes arbitrators from the list based on current known conflicts
of interest identified in NLSS. The rule also details how NLSS
generates the lists, and how FINRA sends lists to the parties and
handles requests for additional information about arbitrators.
\9\ Rule 12404 states that parties may strike up to four
arbitrators from each list, leaving at least six arbitrator names
remaining. It also explains the process for ranking arbitrator
preferences and returning the lists to FINRA.
\10\ Rule 12405 explains how FINRA prepares combined ranked
lists of arbitrators based on the parties' numerical rankings.
\11\ Rule 12406 explains that FINRA appoints the highest ranked
available arbitrator from each of the combined lists and describes
FINRA's procedures for appointing an arbitrator when the number of
arbitrators available to serve from a combined list is not
sufficient to fill the panel. The rule also provides that
appointment occurs when FINRA sends notice to the parties of the
names of the arbitrators on the panel and that arbitrators must
execute FINRA's arbitrator oath or affirmation before making any
decision as an arbitrator or attending a hearing.
\12\ Rule 12411 provides that if FINRA removes an arbitrator, or
an arbitrator becomes otherwise unable or unwilling to serve, FINRA
appoints as a replacement arbitrator the arbitrator who is the most
highly ranked available arbitrator from the applicable combined
list. It also states the procedure for replacing an arbitrator if
there aren't any arbitrators left on a combined list.
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FINRA would delete current Rules 12402, 12403, 12404, 12405, 12406,
and 12411 in their entirety. FINRA would renumber the remaining rules
in the 12400 series so that the numbering would remain consecutive
after FINRA consolidated the rules.
New Rule 12402--Cases With One Arbitrator
New Rule 12402 (Cases with One Arbitrator) would consolidate the
content of current Rules 12402, 12403, 12404, 12405, 12406, and 12411,
relating to single arbitrator cases. FINRA is not proposing any
substantive changes to the current procedures for selecting,
appointing, and replacing arbitrators in cases with one arbitrator.
New Rule 12403--Cases With Three Arbitrators
New Rule 12403 (Cases with Three Arbitrators) would provide
customers with two options for panel selection in three arbitrator
cases. The first option, the Majority Public Panel, would consist of
the panel composition method currently provided in the Customer Code.
It would ensure that FINRA appoints one non-public arbitrator on a
three arbitrator panel. The second
[[Page 69483]]
option, the Optional All Public Panel (based on the Pilot), if selected
by the customer, would guarantee that any party could select an all
public panel. As stated above, the proposed rule change allows only
customers to make the election between the two panel selection methods.
If implemented as proposed, FINRA will allow any customer that has not
been sent lists of arbitrators to choose between the two panel
selection methods. Except as outlined below, FINRA would incorporate
into new Rule 12403 the contents of current Rules 12403, 12404, 12405,
12406, and 12411, that are pertinent to three arbitrator cases.
Under the proposed rule change, the customers could elect either
arbitrator selection method within 35 days from service of the
Statement of Claim. If the customers declined to make an affirmative
election by the 35-day deadline, FINRA would apply the composition rule
for a Majority Public Panel.
Under either panel selection option, the parties would receive
three lists--i.e., one with 10 chair-qualified public arbitrators, one
with 10 public arbitrators, and one with 10 non-public arbitrators.
FINRA would permit each party to strike up to four arbitrators on the
chair-qualified public and public lists, leaving at least six
arbitrator names remaining on each party's list. However, the process
for striking arbitrators on the non-public list would be different for
each method, as detailed below.
Majority Public Panel--This is the current method for panel
composition. Under this method:
Each separately represented party could exercise up to
four strikes on the non-public list.
FINRA would appoint the highest-ranked available non-
public arbitrator from the combined rankings.
In cases in which the parties struck all of the
arbitrators appearing on the non-public list or when all remaining
arbitrators on the non-public list were unable or unwilling to serve
for any reason, FINRA would appoint a non-public arbitrator selected
randomly by NLSS.
Optional All Public Panel--Under this method of panel composition:
All parties would have unlimited strikes with respect to
the non-public list (meaning that any party may strike up to all names
on the non-public list).
FINRA would not appoint a non-public arbitrator if the
parties (individually or collectively) struck all the arbitrators
appearing on the non-public list or if all remaining arbitrators on the
non-public list were unable or unwilling to serve for any reason.
If all non-public arbitrators were stricken or unavailable
to serve, FINRA would select the next highest-ranked public arbitrator
to complete the panel.
If all public arbitrators were stricken or unavailable to
serve, FINRA would select the next highest-ranked arbitrator on the
public chair-qualified list.
If all public chair-qualified arbitrators were stricken or
unavailable to serve, FINRA would appoint a public arbitrator selected
randomly by NLSS.
Additional Clarifying Provisions
FINRA proposes to add clarity to Rules 12402 and 12403 by stating
that parties are not required to send a copy of their ranking list to
opposing parties.
In addition, under the Optional All Public Panel method, FINRA
would appoint a non-public arbitrator to a panel if the Director did
not receive a party's ranked lists within the timeframe for returning
lists to FINRA because the Director would proceed as though the party
did not want to strike any arbitrator or have any preferences among the
listed arbitrators. FINRA proposes to add clarity to the Optional All
Public Panel provision by alerting parties that a failure to comply
with the required timeframe for returning lists to FINRA may result in
the appointment of a panel consisting of two public arbitrators and one
non-public arbitrator.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\13\ 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 providing customers with choice on
the issue of including a non-public arbitrator on the panel deciding
their case will enhance customers' perception of the fairness of
FINRA's rules and of its securities arbitration process.
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\13\ 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 45 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 or disapprove 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
Send an e-mail to [email protected]. Please include
File Number SR-FINRA-2010-053 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-2010-053. 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
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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-2010-053 and should be
submitted on or before December 3, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-28419 Filed 11-10-10; 8:45 am]
BILLING CODE 8011-01-P