[Federal Register Volume 76, Number 24 (Friday, February 4, 2011)]
[Notices]
[Pages 6500-6503]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2492]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63799; File No. SR-FINRA-2010-053]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed Rule Change Relating to Amendments
to the Panel Composition Rule, and Related Rules, of the Code of
Arbitration Procedure for Customer Disputes
January 31, 2011.
I. Introduction
On October 25, 2010, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposal to amend the panel composition rule, and related rules, of the
Code of Arbitration Procedure for Customer Disputes (``Customer
Code''),\3\ to provide customers with the option to choose an all
public arbitration panel in all cases. The proposed rule change was
published for comment in the Federal Register on November 12, 2010.\4\
The Commission received 125 comments on the proposed rule change.\5\ Of
the comments received, 103 commenters support the proposal as filed, 21
commenters support the proposal with suggested modifications, and one
commenter opposes the proposal. On December 16, 2010, FINRA responded
to comments and filed Amendment No. 1 to the proposed rule change.\6\
The Commission is publishing this notice and order to solicit comment
on Amendment No. 1 and to approve, on an accelerated basis, the
proposal as modified by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ FINRA Manual, Rule 12000, et seq., available on FINRA's Web
site, http:www.finra.org.
\4\ See Securities Exchange Act Release No. 63250 (Nov. 5,
2010), 75 FR 69481 (Nov. 12, 2010) (``Notice'').
\5\ The comment period ended on December 3, 2010; all comments
are posted on the Commission's Web site, http://www.sec.gov/rules/sro.shtml.
\6\ See Response to Comments and Amendment No. 1. The text of
the proposal and Response to Comments and Amendment No. 1 are
available on FINRA's Web site, http:www.finra.org, at the principal
office of FINRA, and on the Commission's Web site, http://www.sec.gov/rules/sro.shtml. Amendment No. 1 imposes an additional
notice requirement from FINRA to customers, provides minor
clarifications regarding FINRA's original intent for the scope of
the rule change, and makes other minor technical edits. FINRA
identifies and discusses the particular commenters that support,
request modification and oppose the proposal in its Response to
Comments and Amendment No. 1. For the purposes of this Order, we
will use the same designations for the commenters that are used by
FINRA in that response.
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II. Description of the Proposed Rule Change as Modified by Amendment
No. 1
FINRA proposed to amend the panel composition rule, and related
rules, of the Customer Code to provide customers with the option to
choose an all public arbitration panel in all cases.
A. Background
Under the Customer Code, 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 \7\ comprised of a chair-qualified public
arbitrator,\8\ a public arbitrator,\9\ and a non-public arbitrator
(``Majority Public Panel'').\10\ FINRA uses its computerized Neutral
List Selection System (``NLSS'') to generate random lists of 10
arbitrators from each of these categories.\11\ 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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\7\ 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.
\8\ Rule 12400(c) specifies the criteria for arbitrator
inclusion on the chairperson roster.
\9\ Rule 12100(u) specifies the criteria FINRA uses to classify
arbitrators as public.
\10\ Rule 12100(p) specifies the criteria FINRA uses to classify
arbitrators as non-public.
\11\ Rule 12400.
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B. FINRA's Public Arbitrator Pilot Program
In order to address the perception that FINRA's mandatory inclusion
of a non-public arbitrator (often referred to as the ``industry''
arbitrator) in the Majority Public Panel is not fair to customers,
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 (``Optional All Public
Panel'').
FINRA designed the Pilot to run for two sequential years (``Year
One'' and ``Year Two''), 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 as Year Two, while FINRA proceeds with the
current rulemaking process. Year Three of the Pilot began October 6,
2010, and ends October 5, 2011, or upon implementation of this proposed
rule change, whichever comes first.
Under the Pilot, only a customer may decide whether his or her case
should proceed under Pilot rules; the participating firms cannot select
the Pilot cases. Under the Pilot rules, the parties receive the same
three lists of proposed arbitrators that parties in non-Pilot cases
receive. However, in the Pilot cases, any party can strike up to four
arbitrators on the chair-qualified public arbitrator list, up to four
arbitrators on the public arbitrator list, as well as all of the
arbitrators on the non-public list. After striking arbitrators from the
lists, the parties will rank the remaining arbitrators in order of
preference and FINRA will appoint the panel from among the names
remaining on the lists that the parties return. By striking all the
arbitrators on the non-public list, any party may ensure a panel of
three public arbitrators.
FINRA stated that reactions from participants in the Pilot indicate
that customer representatives strongly support the right of customers
to decide whether to exclude any non-public arbitrator.\12\ That
feedback led FINRA to propose amending the panel composition rule for
customer cases to follow the Pilot model, and to allow the customer
party to choose between the existing panel selection method and the
method used in the Pilot. Unlike the Pilot, however, the proposed rule
would apply to all customer disputes against
[[Page 6501]]
any firm and any registered representative.
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\12\ During the Pilot FINRA conducted surveys, focus groups, and
met with customer representatives from the Securities Industry
Conference on Arbitration and FINRA's National Arbitration and
Mediation Committee.
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C. Details of the Proposed Rule Change
FINRA based the proposed rule change on its experience with the
Pilot. Under the proposed rule change, a customer could elect either
arbitrator selection method within 35 days from service of the
Statement of Claim. If the customer declined to make an affirmative
election by the 35-day deadline, FINRA would apply the composition rule
for the existing Majority Public Panel.
Under either panel selection option, the parties would receive
three lists--one with 10 chair-qualified public arbitrators, one with
10 public arbitrators, and one with 10 non-public arbitrators. The
parties would select their panel through a process of striking and
ranking the arbitrators on the lists. Under the Majority Public Panel
method, FINRA would permit each party to strike up to four arbitrators
on the chair-qualified public, public, and non-public lists, leaving at
least six arbitrator names remaining on each party's list. Under the
Optional All Public Panel, any party may strike up to four arbitrators
on the chair-qualified public and public lists, but may also strike all
proposed non-public arbitrators and thereby effectively choose a panel
of three public arbitrators.
Currently, six rules enumerate the procedures for selecting,
appointing, and replacing arbitrators.\13\ FINRA proposed to
consolidate these six 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.\14\ 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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\13\ Rule 12402 (Composition of Arbitration Panels) specifies
the panel composition for all customer cases. Rules 12403
(Generating and Sending Lists to the Parties), 12404 (Striking and
Ranking Arbitrators), 12405 (Combining Lists), 12406 (Appointment of
Arbitrators; Discretion to Appoint Arbitrators Not on List), and
12411 (Replacement of Arbitrators) enumerate the procedures for
selecting, appointing, and replacing arbitrators.
\14\ 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.
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III. Summary of Comments
A. Customer Election of Panel Composition Method
Some commenters suggested that the Optional All Public Panel method
of panel composition should be the default instead of the Majority
Public Panel method.\15\ Commenters also raised concerns that customers
without attorneys (``pro se'' claimants), or attorneys new to the
practice of securities arbitration, might not elect the Optional All
Public Panel method within the prescribed deadline, or might not
appreciate the benefit of electing this method.\16\ One commenter
stated that pro se claimants may be confused by receiving a list of
non-public arbitrators after making the election for the Optional All
Public Panel method.\17\ Another commenter suggested that, if a
customer elects to proceed with the Optional All Public Panel method of
panel composition, the parties should only receive lists of public
arbitrators (i.e., they should not receive a list of non-public
arbitrators).\18\ Finally, two commenters asked FINRA to clarify
whether customers may make their panel composition election at the time
of filing the Statement of Claim.\19\
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\15\ See Haigney comment, Sutherland comment, Black and Gross
comment, Berg comment, PIABA comment; St. John's comment; and NASAA
comment.
\16\ See Haigney comment.
\17\ See NASAA comment. The comment also suggests that FINRA
change the ``majority public panel'' option label to ``mixed
affiliation'' and that FINRA describe the term ``non-public
arbitrator'' as ``industry-affiliated.'' In its response to
comments, FINRA stated that the Majority Public Panel label clearly
describes the panel composition and that changing the term ``non-
public'' at this point would cause confusion.
\18\ See Berg comment.
\19\ See the Haigney comment and the PIABA comment.
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FINRA responded to these comments by stating that it believes it is
appropriate to have customers elect the Optional All Public Panel
method rather than having that option as the default.\20\ During the
Pilot, a substantial percentage of customers opted for a Majority
Public Panel. From launch of the Pilot in October 2008, until December
1, 2010, in 74 percent of cases eligible for the Pilot, customers
accepted a non-public arbitrator on their panel either by choosing not
to participate in the Pilot or by ranking one or more non-public
arbitrators.\21\ FINRA stated that there were very few complaints from
customers that they were not aware of the Pilot and that it is
appropriate to have customers elect, rather than be defaulted to, the
Optional All Public Panel method.\22\
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\20\ See Response to Comments and Amendment No. 1, supra, note
6.
\21\ Id.
\22\ Id.
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While FINRA indicated that the percentage of pro se claimants that
file arbitration claims over $100,000 at FINRA is very small, to
respond to the commenters' concerns relating to pro se claimants and to
attorneys new to the practice of securities arbitration, FINRA is
proposing to amend the proposed rule change to state that FINRA will
notify the customer in writing that the customer has 35 days from
service of the Statement of Claim to elect the Optional All Public
Panel method. Further, FINRA will highlight the rule change in its case
filing instructions, website information, and other materials, as
applicable. FINRA stated that it believes that amending the proposed
rule change to add a customer notification provision and highlighting
in its written materials how the panel composition methods work will
ensure that customers understand how to elect the Optional All Public
Panel method and are aware of the applicable deadlines for election.
FINRA also stated that during the Pilot, a substantial percentage of
customers opted for a majority public panel and for this reason did not
change the selection process in the proposal.
With regard to the comment that customers electing the Optional All
Public Panel receive three lists of public arbitrators, FINRA stated
that given the data FINRA compiled from the Pilot, it did not at this
time find persuasive the comments requesting that customers receive a
list only of public arbitrators.\23\
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\23\ See Response to Comments and Amendment No. 1, supra, note
6.
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FINRA also stated that it intends to allow customers to make their
election of the Optional All Public Panel in the Statement of Claim (or
correspondence accompanying the Statement of Claim) in instances when
the customers are claimants.\24\ Therefore, FINRA is proposing to amend
the proposed rule change to state that the customer may elect in
writing to proceed under either the composition rules for the Majority
Public Panel or the composition rules for the Optional All Public Panel
in the customer's Statement of Claim, if the customer is a claimant, or
at any time up to 35 days from service of the Statement of Claim,
whether the customer is a complainant or respondent.
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\24\ Id.
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In addition, FINRA is proposing to correct an error in the title of
proposed Rule 12403(b) which, as proposed, states ``Customer Claimant
Election.'' FINRA proposes to amend the title to
[[Page 6502]]
eliminate the reference to ``Claimant'' because a customer may be a
respondent in FINRA arbitration and FINRA intends the proposed rule
change to apply to all customer disputes regardless of whether
customers are claimants or respondents.
B. Effect of Proposed Rule Change on Individually Named Registered
Representatives
The proposed rule change would apply to all firms and all
registered representatives. One commenter opposed applying the proposed
rule change to individually named registered representatives.\25\
According to the commenter, FINRA should provide registered
representatives with the procedural protection of having a non-public
arbitrator on their arbitration panel. FINRA stated that it believes
that the commenter's suggestion is unworkable.\26\ If FINRA does not
apply the proposed rule change to individually named registered
representatives, customers that wish to proceed under the Optional All
Public Panel method for their claims against firms would be compelled
to bifurcate their claims against firms from their claims against
registered representatives. Moreover, if the firm wishes to assert a
third party claim against a registered representative in a customer
case where a customer elected the Optional All Public Panel composition
method, the firm's claim could interfere with the customer's election
of the Optional All Public Panel. Finally, FINRA believes that
bifurcation of customers' claims is likely to result in higher overall
arbitration costs for customers. FINRA, thus, concluded that the
consequences of the commenter's suggestion would make the suggestion
inefficient and impractical.
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\25\ See SIFMA comment.
\26\ See Response to Comments and Amendment No. 1, supra, note
6.
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C. Inclusion of a Non-Public Arbitrator
Two commenters stated that inclusion of a non-public arbitrator
would benefit all the parties to a dispute, as well as the public
arbitrators on the panel, by appropriately educating them about
industry-related issues.\27\ One commenter stated that the non-public
arbitrator may also reduce costs for the parties by limiting the need
for the parties to call expert witnesses.\28\
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\27\ See SIFMA comment and Wacht comment.
\28\ See SIFMA comment.
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In contrast, a number of commenters stated that parties frequently
use expert witnesses in cases with majority public panels, which limits
the need for the non-public arbitrator's industry expertise and any
potential cost savings.\29\
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\29\ See Neuman comment, Shewan comment, Banks comment, and
Rosenberg comment.
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Under the Pilot and the amended rules, customers who do not elect
the Optional All Public Panel selection method, will continue to have a
panel that includes a non-public arbitrator. FINRA stated that it
received feedback on the Pilot from both investor and industry
attorneys that indicates that panel composition made no difference in
how parties used experts to try their cases.\30\ In addition, a number
of commenters expressed concerns about the non-public arbitrator
offering expert opinions to the other arbitrators where those opinions
would not be subject to cross-examination.\31\ Regarding the comments
that a non-public arbitrator may act as an expert witness not subject
to cross-examination, FINRA stated that it believes that the proposed
rule mitigates the concern because any customer that shares this
concern may elect the Optional All Public Panel.\32\ Therefore, FINRA
did not amend the proposal as it relates to the non-public arbitrator.
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\30\ See Response to Comments and Amendment No. 1, supra, note
6.
\31\ See Aidikoff comment, Coleman comment, Amato comment,
Eccleston comment, Goldstein comment, Karen comment, Fogel comment,
Cornell comment, Mihalek comment, PIABA comment, and NASAA comment.
\32\ See Response to Comments and Amendment No. 1, supra, note
6.
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D. Request To Reject the Proposed Rule Change
One commenter requested that the Commission reject the proposed
rule change as contrary to the public interest.\33\ The commenter
stated that FINRA has other tools to correct the public's perception
that FINRA arbitration is not fair to investors. FINRA stated that it
believes that the results of the Pilot, the public's feedback on the
program, and the overwhelming support reflected in the comments
submitted on the proposed rule change support the need to provide
customers with the choice of whether to select an Optional All Public
Panel or a Majority Public Panel.\34\
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\33\ See Wacht comment.
\34\ See Response to Comments and Amendment No. 1, supra, note
6.
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E. Comments Outside the Scope of the Proposed Rule Change
Commenters raised a number of additional issues, including concerns
regarding mandatory arbitration of investor disputes; \35\ the
definition of ``public arbitrator''; \36\ investor arbitration fees;
\37\ the discovery process at FINRA; \38\ the NLSS; and blue sky
laws.\39\ Stating that all of these comments are outside of the scope
of the proposed rule change, FINRA declined to make changes to address
them.\40\ FINRA also stated that it believes its arbitration forum is
fair, and highlighted that it does not require firms to use pre-dispute
arbitration clauses.\41\
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\35\ See: Layne comment, Steiner comment, Chalmers comment,
Gladden comment, Estell comment, Sutherland comment, Furgison
comment, Healy comment, Samson comment, Berg comment, Miller
comment, Ilgenfritz comment, Rosenfield comment, Bleecher comment,
Mihalek comment, and NASAA comment.
\36\ See Goldstein comment.
\37\ See Layne comment.
\38\ See Layne comment and Estell comment.
\39\ See Estell comment.
\40\ See Response to Comments and Amendment No. 1, supra, note
6.
\41\ Id.
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IV. Discussion and Finding
After carefully reviewing the proposed rule change, the comment
letters, and FINRA's Response to Comments and Amendment No. 1, the
Commission finds that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities association.\42\ In particular, the
Commission believes that the proposed rule change, as amended, is
consistent with the provisions of Section 15A(b)(6) of the Act, 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.\43\ The Commission believes the
proposed rule change, as amended, will enhance the public's perception
that the FINRA securities arbitration process and rules are fair and
would promote just and equitable principles of trade by giving
investors additional choices regarding the composition of panels that
will hear their cases. This, in turn, should help enhance public
confidence in, and perception of, the fairness of the FINRA arbitration
forum. We understand that FINRA plans to implement this rule change as
soon as possible to provide this option to as many customers as
possible.
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\42\ In approving the proposed rule change, the Commission has
considered the rule change's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\43\ See 15 U.S.C. 78o-3(b)(6).
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V. Accelerated Approval
The Commission finds good cause, pursuant to Section 19(b)(2) of
the
[[Page 6503]]
Act,\44\ for approving the proposed rule change, as amended, prior to
the 30th day after the date of publication in the Federal Register. The
changes proposed in Amendment No. 1 do not raise novel regulatory
concerns. Moreover, accelerating approval of this proposal should
benefit investors by providing customers with the immediate option to
select an all public arbitration panel for all cases. Accordingly, the
Commission finds that good cause exists to approve the proposal, as
modified by Amendment No. 1, on an accelerated basis.
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\44\ 15 U.S.C. 78s(b)(2).
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VI. 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 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 February 25, 2011.
VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\45\ that the proposed rule change (SR-FINRA-2010-053), as modified
by Amendment No. 1, be, and hereby is, approved on an accelerated
basis.
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\45\ 15 U.S.C. 78s(b)(2).
\46\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-2492 Filed 2-3-11; 8:45 am]
BILLING CODE 8011-01-P