Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices 11695 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Exchange Act Release No. 72491 (Jun. 27, 2014), 

79 FR 38080 (Jul. 3, 2014) (Notice of Filing of 

Proposed Rule Change Relating to Revisions to the 

Definitions of Non-Public Arbitrator and Public 

Arbitrator) (‘‘Notice of Filing’’). The comment 

period closed on July 24, 2014. 

4Of the 316 letters, 21 were unique letters, and 

295 of the letters followed a form designated as the 

‘‘Type A’’ letter, submitted by self-identified 

independent financial advisors (‘‘independent 

financial advisors’’) (‘‘Type A Letter’’). The unique 

letters were submitted by: Philip M. Aidikoff, 

Aidikoff, Uhl & Bakhtiari, dated July 1, 2014 

(‘‘Aidikoff Letter’’); Steven B. Caruso, Esq., Maddox 

Hargett & Caruso, P.C., dated July 1, 2014 (‘‘Caruso 

July Letter’’); Ryan K. Bakhtiari, Aidikoff, Uhl & 

Bakhtiari, dated July 2, 2014 (‘‘Bakhtiari July 

Letter’’); Richard A. Stephens, Attorney at Law, 

dated July 6, 2014 (‘‘Stephens Letter’’); Daniel E. 

Bacine, Barrack, Rodos & Bacine, dated July 18, 

2014 (‘‘Bacine Letter’’); Blossom Nicinski, dated 

July 20, 2014 (‘‘Nicinski Letter’’); Christopher L. 

Mass, dated July 21, 2014 (‘‘Mass Letter’’); Glenn S. 

Gitomer, McCausland Keen and Buckman, dated 

July 23, 2014 (‘‘Gitomer July Letter’’); David T. 

Bellaire, Esq., Executive Vice President & General 

Counsel, Financial Services Institute, dated July 24, 

2014 (‘‘FSI Letter’’); Thomas J. Berthel, CEO, Berthel 

Fisher & Company, dated July 24, 2014 (‘‘Berthel 

Letter’’); Kevin M. Carroll, Managing Director and 

Associate General Counsel, Securities Industry and 

Financial Markets Association, dated July 24, 2014 

(‘‘SIFMA July Letter’’); CJ Croll, Student Intern, 

Elissa Germaine, Supervising Attorney, and Jill I. 

Gross, Director, Investor Rights Clinic at Pace Law 

School, dated July 24, 2014 (‘‘PIRC July Letter’’); 

Jason Doss, President, Public Investors Arbitration 

Bar Association, dated July 24, 2014 (‘‘PIABA 

Letter’’); George H. Friedman, Esq., George H. 

Friedman Consulting, LLC, dated July 24, 2014 

(‘‘Friedman July Letter’’); Gary N. Hardiman, dated 

July 24,2014 (‘‘Hardiman Letter’’); J. Burton 

LeBlanc, President, American Association for 

Justice, dated July 24, 2014 (‘‘AAJ Letter’’); Richard 

P. Ryder, Esq., President, Securities Arbitration 

Commentator, Inc., dated July 24, 2014 (‘‘SAC July 

Letter’’); Andrea Seidt, President, North American 

Securities Administrators Association, and Ohio 

Securities Commissioner, dated July 24, 2014 

(‘‘NASAA July Letter’’); Robert Getman, dated July 

28, 2014 (‘‘Getman Letter’’); Barry D. Estell, 

Attorney at Law (retired), dated August 13, 2014 

(‘‘Estell Letter’’); and Walter N. Vernon III, Esq., 

dated August 21, 2014 (‘‘Vernon Letter’’). Comment 

letters are available at www.sec.gov. 

The Commission discussed these comments in 

the Proceedings Order. See infra note 7. 

5Letter from Margo A. Hassan, Assistant Chief 

Counsel, FINRA Dispute Resolution, to Brent J. 

Fields, Secretary, SEC, dated September 30, 2014 

(‘‘FINRA September Letter’’). The FINRA September 

Letter is available at www.sec.gov. 

6 15 U.S.C. 78s(b)(2)(B). 

7Exchange Act Release No. 73277 (Oct. 1, 2014), 

79 FR 60556 (Oct. 7, 2014) (Order Instituting 

Proceedings To Determine Whether To Approve or 

Disapprove Proposed Rule Change Relating to 

Revisions to the Definitions of Non-Public 

Arbitrator and Public Arbitrator) (‘‘Proceedings 

Order’’). The comment period closed on November 

6, 2014. 

8The comment letters were submitted by: John A. 

Bender, Esq., Member, Ryan Swanson Cleveland, 

dated October 10, 2014 (‘‘Bender Letter’’); George H. 

Friedman, Esquire, George H. Friedman Consulting, 

LLC, dated October 20, 2014 (‘‘Friedman October 

Letter’’); Richard P. Ryder, Esq., President, 

Securities Arbitration Commentator, Inc., dated 

October 26, 2014 (‘‘SAC October Letter’’); Steven B. 

Caruso, Esq., Maddox Hargett & Caruso, P.C., dated 

October 29, 2014 (‘‘Caruso October Letter’’); Ryan 

K. Bakhtiari, Aidikoff, Uhl & Bakhtiari, dated 

October 30, 2014 (‘‘Bakhtiari October Letter’’); 

Glenn S. Gitomer, McCausland Keen and Buckman, 

dated November 5, 2014 (‘‘Gitomer November 

Letter’’); William Beatty, President, North American 

Securities Administrators Association and 

Washington Securities Administrator, dated 

Continued 

For the Nuclear Regulatory Commission. 

Annette L. Vietti-Cook, 

Secretary of the Commission. 

[FR Doc. 2015–04490 Filed 3–3–15; 8:45 am] 

BILLING CODE 7590–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74247A; File No. SR– 

BATS–2015–09] 

Self-Regulatory Organizations; BATS 

Exchange, Inc.; Notice of Filing of a 

Proposed Rule Change To Amend 

Rules 11.9, 11.12, and 11.13 of BATS 

Exchange, Inc.; Correction 

February 26, 2015. 

AGENCY: Securities and Exchange 

Commission 

ACTION: Notice; correction. 

SUMMARY: The Securities and Exchange 

Commission published a document in 

the Federal Register on February 18, 

2015, concerning a Notice of Filing of a 

Proposed Rule Change to Amend Rules 

11.9, 11.12, and 11.13 of BATS 

Exchange, Inc.. The document 

contained a typographical error. 

FOR FURTHER INFORMATION CONTACT: 

Christopher P. Grobbel, Division of 

Trading and Markets, Securities and 

Exchange Commission, 100 F Street NE., 

Washington, DC 20549, (202) 551–5491. 

Correction 

In the Federal Register of February 

18, 2015 in FR Doc. 2015–3222, on page 

8720, in the first and second line in the 

subheading under the heading 

‘‘SECURITIES AND EXCHANGE 

COMMISSION’’ in the third column, 

correct the reference to ‘‘File No. SR– 

BATS–2014–09’’ instead to ‘‘File No. 

SR–BATS–2015–09.’’ 

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. 2015–04423 Filed 3–3–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74383; File No. SR–FINRA– 

2014–028] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving a 

Proposed Rule Change Relating to 

Revisions to the Definitions of NonPublic Arbitrator and Public Arbitrator 

February 26, 2015. 

I. Introduction 

On June 17, 2014, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) 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 FINRA Rule 12100(p) of the 

Code of Arbitration Procedure for 

Customer Disputes (‘‘Customer Code’’) 

and FINRA Rule 13100(p) of the Code 

of Arbitration Procedure for Industry 

Disputes (‘‘Industry Code’’) 

(collectively, ‘‘Codes’’), defining the 

term ‘‘non-public arbitrator;’’ and 

FINRA Rule 12100(u) of the Customer 

Code and Rule 13100(u) of the Industry 

Code, defining the term ‘‘public 

arbitrator.’’ 

The proposed rule change was 

published for comment in the Federal 

Register on July 3, 2014.3 On August 4, 

2014, FINRA extended the time period 

in which the Commission must approve 

the proposed rule change, disapprove 

the proposed rule change, or institute 

proceedings to determine whether to 

approve or disapprove the proposed 

rule change to October 1, 2014. The 

Commission received three hundred 

sixteen (316) comment letters in 

response to the Notice of Filing.4 On 

September 30, 2014, the Commission 

received a letter from FINRA responding 

to the comment letters.5 On October 1, 

2014, the Commission issued an order 

to institute proceedings pursuant to 

section 19(b)(2)(B) of the Act 6 to 

determine whether to approve or 

disapprove the proposed rule change. 

The order was published for comment 

in the Federal Register on October 7, 

2014.7 The Commission received 

fourteen (14) comment letters in 

response to the Proceedings Order.8 On 

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11696 Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices 

November 6, 2014 (‘‘NASAA November Letter’’); 

Kevin M. Carroll, Managing Director and Associate 

General Counsel, Securities Industry and Financial 

Markets Association, dated November 6, 2014 

(‘‘SIFMA November Letter’’); Ryan Corbin, Kori 

Eskridge, and Kristina Ludwig, Student Interns, and 

Nicole Iannarone, Assistant Clinical Professor, 

Georgia State University College of Law Investor 

Advocacy Clinic, dated November 6, 2014 (‘‘GSU 

Letter’’); CJ Croll and Jeffrey Valacer, Student 

Interns, Elissa Germaine, Supervising Attorney, and 

Jill I. Gross, Director, Investor Rights Clinic at Pace 

Law School, dated November 6, 2014 (‘‘PIRC First 

November Letter’’); Greg Curley, Senior Litigation 

Counsel, American International Group, Inc., AIG 

Advisor Group, Inc., dated November 6, 2014 (‘‘AIG 

Letter’’); William A. Jacobson, Esq., Clinical 

Professor of Law and Director, and Nathan F. Baum, 

Student, Cornell University Law School Securities 

Law Clinic, dated November 6, 2014 (‘‘CSLC 

Letter’’); Daniel Wolfe, Legal Intern, and Teresa 

Verges, Director, University of Miami Investor 

Rights Clinic, dated November 6, 2014 (‘‘UMIRC 

Letter’’); and CJ Croll and Jeffrey Valacer, Student 

Interns, Elissa Germaine, Supervising Attorney, and 

Jill I. Gross, Director, Investor Rights Clinic at Pace 

Law School, dated November 21, 2014 (‘‘PIRC 

Second November Letter’’). Comment letters are 

available at www.sec.gov. 

9Letter from Margo A. Hassan, Assistant Chief 

Counsel, FINRA Dispute Resolution, to Brent J. 

Fields, Secretary, SEC, dated November 24, 2014 

(‘‘FINRA November Letter’’). The FINRA November 

Letter is available at www.sec.gov. 

10Letter from Margo A. Hassan, Assistant Chief 

Counsel, FINRA Dispute Resolution, to Brent J. 

Fields, Secretary, SEC, dated December 11, 2014 

(‘‘FINRA December Letter’’). The FINRA December 

Letter is available at www.sec.gov. 

11Where this order refers only to rules in the 

Customer Code, the changes and discussions also 

apply to the corresponding rules in the Industry 

Code. 

12See current Rule 12100(p)(1). This provision 

applies to a person who is, or was within the past 

five years: (1) Associated with, including registered 

through, a broker or dealer (including a government 

securities broker or dealer or a municipal securities 

dealer); (2) registered under the Commodities 

Exchange Act; (3) a member of a commodities 

exchange or a registered futures association; or (4) 

associated with a person or firm registered under 

the Commodities Exchange Act. 

13See current Rule 12100(p)(2). 

14See current Rule 12100(u)(2). 

15Currently, FINRA Rules preclude these 

individuals from serving as arbitrators in any 

capacity. See current Rule 12100(p) and (u). If, 

however, they end their affiliation they may serve 

as public arbitrators after a two-year cooling-off 

period. These individuals may serve as non-public 

arbitrators if they are qualified to serve under 

another provision (e.g., dually registered as an 

investment adviser and an associated person of a 

FINRA member). 

16See current FINRA Rule 12100(p)(1)(B)-(D). 

17See current FINRA Rule 12100(p)(1)(C). 

18The rule applies to the persons and entities 

listed in current Rule 12100(p)(1). 

19See current Rule 12100(u)(2). 

November 24, 2014, the Commission 

received a letter from FINRA responding 

to the comment letters.9 On December 

11, 2014, the Commission received a 

letter from FINRA supplementing the 

FINRA November Letter.10

This order approves the proposed rule 

change. 

II. Description of the Proposed Rule 

Change 

In general, FINRA classifies 

arbitrators as ‘‘non-public’’ or ‘‘public’’ 

based on their professional and personal 

affiliations. Currently, FINRA Rule 

12100(p) of the Customer Code and 

FINRA Rule 13100(p) of the Industry 

Code (defining the term ‘‘non-public 

arbitrator’’) list financial industry 

affiliations that might qualify a person 

to serve as a non-public arbitrator in the 

FINRA arbitration forum. Conversely, 

FINRA Rule 12100(u) of the Customer 

Code and FINRA Rule 13100(u) of the 

Industry Code (defining the term 

‘‘public arbitrator’’) list affiliations that 

disqualify a person from serving as a 

public arbitrator in the FINRA 

arbitration forum. FINRA is proposing 

to delete the definitions in their 

entirety, and replace them with new 

definitions. The proposed amendments 

are described below. 

A. Non-Public Arbitrator Definition 

1. Proposed New Rule 12100(p)(1) 11

Under the current non-public 

arbitrator definition, if a person is 

currently, or was within the past five 

years, affiliated with a financial 

industry entity specified in the rule (a 

‘‘specified financial industry entity’’), 

the person is classified as a non-public 

arbitrator.12 The rule permits these 

individuals to be reclassified as public 

arbitrators five years after ending all 

financial industry affiliations unless (i) 

they retired from, or spent a substantial 

part of their career with, a specified 

financial industry entity 13 or (ii) they 

were affiliated for 20 years or more with 

a specified financial industry entity.14

The individuals subject to these 

exceptions remain classified as nonpublic arbitrators. 

New Rule 12100(p)(1) would 

eliminate the five-year cooling-off 

provision for persons who work in the 

financial industry by permanently 

classifying persons who are, or were, 

affiliated with a specified financial 

industry entity at any point in their 

careers, for any duration, as non-public 

arbitrators. New Rule 12100(p)(1) would 

also add two new categories of financial 

industry professionals who would be 

permanently classified as non-public 

arbitrators: (i) Persons associated with, 

including registered through, a mutual 

fund or hedge fund, and (ii) persons 

associated with, including registered 

through, an investment adviser.15

In addition, new Rule 12100(p)(1) 

would clarify certain references made in 

the current rule. For instance, the new 

rule would replace ‘‘[a person] 

registered under the Commodity 

Exchange Act; a member of a 

commodities exchange . . ., or 

associated with a person or firm 

registered under the Commodity 

Exchange Act,’’ 16 with ‘‘a person who 

is, or was, associated with, including 

registered through, under, or with (as 

applicable), . . . the Commodity 

Exchange Act or the Commodities 

Futures Trading Commission[.]’’ Also, 

instead of referring to ‘‘a member . . . 

of a registered futures association,’’ 17

new Rule 12100(p)(1)(B) would identify 

the association as the National Futures 

Association. Moreover, new Rule 

12100(p)(1)(B) would include a 

reference to ‘‘[a person] who is, or was, 

associated with, including registered 

through, under, or with (as applicable), 

. . . the Municipal Securities 

Rulemaking Board.’’ In addition, new 

Rule 12100(p)(1)(C) would include a 

provision to cover any entity ‘‘organized 

under or registered pursuant to the 

Securities Exchange Act of 1934, 

Investment Company Act of 1940, or the 

Investment Advisers Act of 1940.’’ This 

provision would cover financial 

industry affiliated persons not otherwise 

specified in the rule and potential 

categories of financial industry 

professionals that may be created in the 

future. 

2. Proposed New Rule 12100(p)(2) 

Under current Rule 12100(p)(3), 

attorneys, accountants, and other 

professionals who devoted 20 percent or 

more of their professional work in the 

last two years to serving specified 

financial industry entities and/or 

employees, are classified as non-public 

arbitrators.18 Rule 12100(p)(3) permits 

these individuals to be reclassified as 

public arbitrators two years after they 

stopped providing services to specified 

financial industry entities, with one 

exception. A person who provided 

services for 20 calendar years or more 

over the course of his or her career is 

permanently disqualified from serving 

as a public arbitrator.19

Proposed new Rule 12100(p)(2) would 

broaden the application of current Rule 

12100(p)(3) in three ways: (i) It would 

increase the look-back period from two 

years to five years, (ii) it would apply to 

not only services provided to specified 

financial industry entities but also to 

services provided to any persons or 

entities associated with those specified 

financial industry entities, and (iii) it 

would permanently disqualify from 

serving as public arbitrators persons 

who provided the specified services for 

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Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices 11697 

20See proposed new Rule 12100(u)(2). The 15 

years are a total number of years—they would not 

have to be consecutive years. 

21Currently, these individuals are not qualified 

under the non-public arbitrator definition to serve 

as non-public arbitrators, nor are they disqualified 

from serving as public arbitrators under the public 

arbitration definition. 

22See proposed new Rule 12100(u)(3). The 15 

years are a total number of years—they would not 

have to be consecutive years. 

23See current Rule 12100(u)(2). 

24See proposed new Rule 12100(u)(4). The 15 

years are a total number of years—they would not 

have to be consecutive years. 

25See proposed new Rule 12100(u)(4). 

26See supra notes 12, 12, and 13 and their 

accompanying text. 

27Current Rule 12100(u)(3) subjects investment 

advisers and persons associated with, including 

registered through, a mutual fund or hedge fund to 

a two-year cooling-off period after ending the 

affiliation. Under proposed new Rule 12100(u)(1), 

these individuals would also be subject to 

permanent classification as non-public arbitrators. 

28Although the descriptions of the 

disqualifications in proposed new Rules 

12100(u)(2) and 12100(u)(6) are almost identical, 

FINRA believes it would add clarity to the 

definition to distinguish when the provisions 

would result in a permanent classification, and 

when they would result in a temporary 

classification. See Notice of Filing, 79 FR 38080, 

38084 (Jul. 3, 2014). 

29See current Rule 12100(u)(1) (incorporating, 

among other things, current Rule 12100(p)(3)). 

30See current Rule 12100(u)(2) (referencing the 

20-year time period). 

15 calendar years or more over the 

course of their careers (in contrast to the 

current 20 year provision).20

In addition, the proposal would 

replace the phrase ‘‘professional work’’ 

with ‘‘professional time.’’ 

3. Proposed New Rule 12100(p)(3) 

Currently, FINRA rules permit 

individuals who represent or provide 

professional services to investors in 

securities disputes to serve as public 

arbitrators.21

Under proposed new Rule 

12100(p)(3), attorneys, accountants, and 

other professionals who devoted 20 

percent or more of their professional 

time, within the past five years, to 

serving parties in investment or 

financial industry employment disputes 

would be classified as non-public 

arbitrators. However, Rule 12100(p)(3) 

would permit these individuals to serve 

as public arbitrators five years after they 

stopped devoting 20 percent or more of 

their professional time to serving parties 

in investment or financial industry 

employment disputes with one 

exception. A person who provided 

services for 15 calendar years or more 

over the course of his or her career 

would be permanently disqualified from 

serving as a public arbitrator.22

4. Proposed New Rule 12100(p)(4) 

Under current Rule 12100(p)(4), any 

person who is an employee of a bank or 

other financial institution who (i) effects 

transactions in securities, including 

government or municipal securities, and 

commodities, futures, or options, or (ii) 

supervises or monitors the compliance 

with the securities and commodities 

laws of employees who engage in such 

activities is classified as a non-public 

arbitrator. When these individuals end 

their affiliation, they are immediately 

reclassified as public arbitrators unless 

they have engaged in this type of work 

for 20 years or more over the course of 

their careers.23

Proposed new Rule 12100(p)(4) would 

add a five-year look-back period to this 

provision. Specifically, under proposed 

new Rule 12100(p)(4), any person who, 

within the last five calendar years, was 

an employee of a bank or other financial 

institution who (i) effects transactions in 

securities, including government or 

municipal securities, commodities, 

futures, or options, or (ii) supervises or 

monitors the compliance with the 

securities and commodities laws of 

employees who engage in such activities 

would be classified as a non-public 

arbitrator. However, proposed new Rule 

12100(p)(4) would permit these 

individuals to serve as public arbitrators 

five years after they ended their 

industry affiliation unless they provided 

these services for 15 years or more.24

After 15 years of service, the proposed 

rules would permanently classify such 

individuals as non-public arbitrators.25

B. Public Arbitrator Definition 

1. Proposed New Rule 12100(u)(1) 

Current Rules 12100(u)(1) and 

12100(u)(3) identify the types of 

financial industry employment that 

disqualify a person from serving as a 

public arbitrator by cross-referencing 

those activities listed in current Rule 

12100(p) (defining ‘‘non-public 

arbitrators’’). Consequently, these 

otherwise qualified individuals are 

classified as non-public arbitrators. 

Proposed new Rule 12100(u)(1) would 

retain the types of financial industry 

employment that would disqualify a 

person from serving as a public 

arbitrator with revisions identical to 

those in proposed new Rule 12100(p)(1). 

Specifically: (i) Instead of referring to 

‘‘[a person] registered under the 

Commodity Exchange Act; a member of 

a commodities exchange . . ., or 

associated with a person or firm 

registered under the Commodity 

Exchange Act,’’ proposed new Rule 

12100(u)(1)(B) would refer to ‘‘a person 

who is, or was, associated with, 

including registered through, under, or 

with (as applicable), . . . the 

Commodity Exchange Act or the 

Commodities Futures Trading 

Commission;’’ (ii) instead of referring to 

‘‘a member . . . of a registered futures 

association,’’ proposed new Rule 

12100(u)(1)(B) would identify the 

association as the National Futures 

Association; (iii) proposed new Rule 

12100(u)(1)(B) would add a reference to 

‘‘[a person] who is, or was, associated 

with, including registered through, 

under, or with (as applicable), . . . the 

Municipal Securities Rulemaking 

Board;’’ and (iv) proposed new Rule 

12100(p)(1)(C) would include a 

provision to cover any entity ‘‘organized 

under or registered pursuant to the 

Securities Exchange Act of 1934, 

Investment Company Act of 1940, or the 

Investment Advisers Act of 1940.’’ This 

provision would cover financial 

industry affiliated persons not otherwise 

specified in the rule and potential 

categories of financial industry 

professionals that may be created in the 

future. 

As stated above, current FINRA Rule 

12100 (p)(1) generally permits 

individuals classified as non-public 

arbitrators to become reclassified as 

public arbitrators five years after ending 

their affiliations (subject to specified 

exceptions).26 As explained in the above 

discussion on proposed new Rule 

12100(p)(1), the proposal would 

eliminate the five-year cooling-off 

period27 resulting in the permanent 

classification of these individuals as 

non-public arbitrators pursuant to new 

Rule 12100(u)(1). 

2. Proposed New Rules 12100(u)(2) and 

12100(u)(6)28

Under current Rule 12100(u)(1), 

attorneys, accountants, and other 

professionals who devoted 20 percent or 

more of their professional work in the 

last two years to serving specified 

financial industry entities and/or 

employees listed in current Rule 

12100(p)(1), may not be classified as 

public arbitrators. However, current 

Rule 12100(u)(1) permits these 

individuals to be reclassified as public 

arbitrators two years after they stopped 

providing those services, with one 

exception.29 A person who provided 

services for 20 calendar years or more 

over the course of his or her career is 

permanently disqualified from serving 

as a public arbitrator.30

Proposed new Rules 12100(u)(2) and 

12100(u)(6) would broaden the 

provisions of current Rule 12100(u)(1) 

in three ways: (i) It would apply to not 

only services provided to specified 

financial industry entities but also to 

services provided to any persons or 

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11698 Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices 

31Cf. current Rule 12100(p)(3) to illustrate the 

scope of coverage to be expanded by proposed new 

Rule 12100(u)(2). 

32The 15 years are a total number of years—they 

would not have to be consecutive years. 

33Substantively, proposed new Rules 12100(u)(2) 

and 12100(u)(6) are analogous to proposed new 

Rule 12100(p)(2). 

34The substance of proposed new Rules 

12100(u)(3) and 12100(u)(7) corresponds to the 

substance of proposed new Rule 12100(p)(3). 

35See proposed new Rule 12100(u)(3). The 15 

years are a total number of years—they would not 

have to be consecutive years. 

36Although the descriptions of the 

disqualifications in proposed new Rules 

12100(u)(4) and 12100(u)(8) are almost identical, 

FINRA believes it would add clarity to the 

definition to distinguish when the provisions 

would result in a permanent classification, and 

when they would result in a temporary 

classification. See Notice of Filing, 79 FR 38080, 

38084 (Jul. 3, 2014). 

37See current Rule 12100(u)(1), which crossreferences current Rule 12100(p)(4), among other 

provisions. 

38See current Rule 12100(u)(2). 

39The 15 years are a total number of years—they 

would not have to be consecutive years. 

40See current Rule 12100(u)(6). 

41See current Rule 12100(u)(7). 

42Under current Rules 12100(u)(6) and 

12100(u)(7), a spouse or immediate family member 

of such individuals would also be classified as a 

non-public arbitrator. 

43See current Rule 12100(u); see also infra note 

49 and accompanying text. 

44Current Rule 12100(u) subjects individuals 

covered by current Rules 12100(u)(6) and 

12100(u)(7) to a two-year cooling-off period after 

ending the affiliation. The disqualification for 

spouses and immediate family members is 

addressed in proposed new Rule 12100(u)(11), 

which retains a two-year cooling-off period after 

ending the affiliation or relationship (discussed 

below). 

45Current Rule 12100(u) subjects individuals 

covered by current Rules 12100(u)(4) and 

12100(u)(5) to a two-year cooling-off period after 

ending the affiliation. 

entities associated with those specified 

financial industry entities;31 (ii) new 

Rule 12100(u)(2) would decrease the 

number of years for a permanent 

disqualification from 20 years to 15 

years;32 and (iii) new Rule 12100(u)(6) 

would increase the cooling-off period 

from two years to five years.33 In sum, 

the proposal would permanently 

disqualify from serving as public 

arbitrators persons who provided the 

specified services for 15 calendar years 

or more over the course of their careers. 

3. Proposed New Rules 12100(u)(3) and 

12100(u)(7) 

Under proposed new Rules 

12100(u)(3) and 12100(u)(7) attorneys, 

accountants, expert witnesses, and other 

professionals who devote 20 percent or 

more of their professional time annually 

to representing or providing services to 

parties in disputes concerning 

investment accounts or transactions, or 

employment relationships within the 

financial industry generally would be 

classified as non-public arbitrators.34

New Rule 12100(u)(7), however, would 

permit these individuals to be 

reclassified as public arbitrators five 

years after the final calendar year in 

which they devoted 20 percent or more 

of their professional time providing 

those services with one exception. A 

person who provided services for 15 

calendar years or more over the course 

of his or her career would be 

permanently disqualified from serving 

as a public arbitrator.35

4. Proposed New Rules 12100(u)(4) and 

12100(u)(8)36

Under current Rule 12100(u)(1), any 

person who is an employee of a bank or 

other financial institution and (i) effects 

transactions in securities, including 

government or municipal securities, and 

commodities, futures, or options, or (ii) 

supervises or monitors the compliance 

with the securities and commodities 

laws of employees who engage in such 

activities is classified as a non-public 

arbitrator.37 When these individuals end 

their affiliation, they may immediately 

be reclassified as public arbitrators 

unless they have engaged in this type of 

work for 20 years or more over the 

course of their careers.38

Proposed new Rules 12100(u)(4) and 

12100(u)(8) would broaden the 

application of provisions of current Rule 

12100(u)(1) in two ways: (i) Proposed 

new Rule 12100(u)(8) would permit 

these individuals to be reclassified as 

public arbitrators five years after they 

ended their affiliation, and (ii) proposed 

new Rule 12100(u)(4) would decrease 

the number of years required for a 

permanent classification as a non-public 

arbitrator from 20 years to 15 years.39

5. Proposed New Rule 12100(u)(5) 

Under current Rules 12100(u)(6) and 

12100(u)(7), individuals who are 

employed by,40 or who are directors or 

officers of,41 an entity that directly or 

indirectly controls, is controlled by, or 

is under common control with, any 

partnership, corporation, or other 

organization that is engaged in the 

securities business are classified as nonpublic arbitrators.42 These persons may 

become public arbitrators two years 

after ending their affiliation.43

Proposed new Rule 12100(u)(5) would 

broaden the provisions of current Rules 

12100(u)(6) and 12100(u)(7) in two 

ways: (i) It would expand the scope of 

the classification by replacing the 

phrase ‘‘securities business’’ with 

‘‘financial industry,’’ and (ii) it would 

increase the cooling-off period from two 

years to five years.44

6. Proposed New Rule 12100(u)(9) 

Under current Rule 12100(u)(4), an 

attorney, accountant, or other 

professional whose firm derived 10 

percent or more of its annual revenue in 

the past two years from providing 

services to specified financial industry 

entities is classified as a non-public 

arbitrator. Similarly, under current Rule 

12100(u)(5), any attorney, accountant, or 

other professional whose firm derived 

$50,000 or more in annual revenue in 

the past two years from providing 

professional services to any specified 

financial industry entity relating to any 

customer dispute concerning an 

investment account or transaction is 

also classified as a non-public arbitrator. 

In both instances, however, current Rule 

12100(u) permits such individuals to be 

reclassified as public arbitrators two 

years after they ended their affiliation 

with the firm or two years after the firm 

no longer derived annual revenue from 

specified financial industry entities that 

exceeding those thresholds.45

Proposed new Rule 12100(u)(9) 

would: (i) Merge current Rules 

12100(u)(4) and 12100(u)(5), and (ii) 

remove the requirement that the $50,000 

in revenue relate to customer disputes 

concerning an investment account or 

transaction. Specifically, under 

proposed new Rule 12100(u)(9) any 

person who is an attorney, accountant, 

or other professional whose firm 

derived $50,000 or more, or at least 10 

percent of its annual revenue, in any 

single calendar year during the past two 

calendar years, from (i) the entities 

listed in proposed new Rule 12100(u)(1) 

and/or from any persons or entities 

associated with such listed entities, or 

(ii) a bank or other financial institution 

where persons effect transactions in 

securities including government or 

municipal securities, commodities, 

futures, or options would be classified 

as a non-public arbitrator. Proposed new 

Rule 12100(u)(9) would, however, 

permit such individuals to be 

reclassified as public arbitrators two 

calendar years after ending their 

employment with the employing firm. 

7. Proposed New Rule 12100(u)(10) 

Under proposed new Rule 

12100(u)(10), attorneys, accountants, 

and other professionals whose firm 

derived $50,000 or more, or at least 10 

percent of its annual revenue, in any 

single calendar year during the past two 

calendar years, from individual and/or 

institutional investors relating to 

securities matters generally would be 

classified as non-public arbitrators. 

Proposed new Rule 12100(u)(10) would, 

however, permit such individuals to be 

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46See current Rule 12100(u)(6). 

47See current Rule 12100(u)(7). 

48See current Rule 12100(u). 

49While current Rule 12100(u) does not include 

a cooling-off period for this classification, FINRA 

stated that it has been its practice to make these 

individuals wait for five years after their spouse or 

immediate family member ends the disqualifying 

affiliation before the individuals may be reclassified 

public arbitrators. See Notice of Filing, 79 FR 

38080, 38085 (Jul. 3, 2014). 

50See supra notes 3 and 7. 

51Some provisions of the proposed rule change 

would result in a similar outcome—the permanent 

classification of certain individuals as non-public 

arbitrators. Accordingly, where the discussion of 

comments references specific provisions of the 

proposal, that discussion may also apply to other 

provisions in the proposal that would result in 

similar outcomes. 

52See Aidikoff Letter, Bakhtiari July Letter, 

Caruso July Letter, Gitomer July Letter, and SIFMA 

July Letter. 

53See SAC July Letter (stating that the proposed 

rule change should be disapproved until a costbenefit analysis is provided) and Friedman July 

Letter (stating that FINRA should ‘‘go back to the 

drawing board’’). 

54See supra note 8. 

55See Caruso October Letter, Bakhtiari October 

Letter, Gitomer November Letter, and SIFMA 

November Letter. 

56See Bender Letter, Friedman October Letter, 

and SAC October Letter. 

57See UMIRC Letter, GSU Letter, AIG Letter, 

CSLC Letter, NASAA November Letter, PIRC First 

November Letter, and PIRC Second November 

Letter. 

58See, e.g., Type A Letter, FSI Letter, Getman 

Letter, and Vernon Letter. 

59See proposed new Rules 12100(p)(1) and (u)(1). 

60See Aidikoff Letter; see also Caruso October 

Letter, Bakhtiari October Letter, Gitomer November 

Letter, SIFMA November Letter, CSLC Letter 

Bakhtiari July Letter, SIFMA July Letter, NASAA 

July Letter, PIABA Letter, and AAJ Letter. 

61See SIFMA November Letter. 

62See Bender Letter, Friedman October Letter, 

SAC October Letter, Type A Letter, FSI Letter, 

Getman Letter, Berthel Letter, and Vernon Letter. 

63See Type A Letter and Berthel Letter; see also 

FSI Letter. 

64See Friedman October Letter; see also PIRC July 

Letter and FSI Letter (suggesting that FINRA should 

Continued 

reclassified as public arbitrators two 

calendar years after ending their 

employment with the employing firm or 

two years after the firm no longer 

derived annual revenue from individual 

and/or institutional investors relating to 

securities matters that exceeding those 

thresholds. 

8. Proposed New Rule 12100(u)(11) 

Under current Rules 12100(u)(6) and 

12100(u)(7), an individual whose 

spouse or immediate family member is 

employed by,46 or is a director or officer 

of,47 an entity that directly or indirectly 

controls, is controlled by, or is under 

common control with, any partnership, 

corporation, or other organization that is 

engaged in the securities business is 

classified as a non-public arbitrator. 

These persons may become public 

arbitrators two years after ending their 

affiliation.48

In addition, under current Rule 

12100(u)(8), an individual whose 

spouse or immediate family member is 

engaged in the conduct or activities 

described in current Rule 12100(p)(1)– 

(4) (i.e., is employed by a specified 

financial entity or provides services to 

such an entity and/or the entity’s 

employees) is classified as a non-public 

arbitrator.49

Proposed new Rule 12100(u)(11) 

would: (i) Merge current Rules 

12100(u)(6), 12100(7), and 12100(u)(8), 

and (ii) add a two year cooling-off 

period. Specifically, under new Rule 

12100(u)(11) a person whose immediate 

family member is an individual whom 

FINRA would disqualify from serving 

on the public arbitrator roster would be 

classified as a non-public arbitrator. 

However, if the person’s immediate 

family member ends the disqualifying 

affiliation, or the person ends the 

relationship with the individual so that 

the individual is no longer the person’s 

immediate family member, the person 

would be able to be reclassified as a 

public arbitrator after two calendar 

years had passed from the end of the 

affiliation or relationship. 

9. Definition of ‘‘Immediate Family 

Member’’ 

Current Rule 12100(u) defines the 

term ‘‘immediate family member’’ to 

include a person’s parent, stepparent, 

child, stepchild, member of a person’s 

household, an individual to whom a 

person provides financial support of 

more than 50 percent of his or her 

annual income, or a person who is 

claimed as a dependent for federal 

income tax purposes. Current Rule 

12100(u) does not define the term 

‘‘spouse.’’ 

Proposed new Rule 12100(u) would 

amend the definition of ‘‘immediate 

family member’’ to add as immediate 

family members a person’s spouse, 

partner in a civil union, and domestic 

partner. 

The text of the proposed rule change 

is available, at the principal office of 

FINRA, on FINRA’s Web site at http:// 

www.finra.org, and at the Commission’s 

Public Reference Room. A more detailed 

description of the proposed rule 

changes is contained in the Notice of 

Filing and the Proceedings Order.50

III. Comment Summary 51

In response to the Notice of Filing, the 

Commission received 316 comment 

letters (including 295 copies of 

substantially the same letter submitted 

by self-identified independent financial 

advisors). Five of the commenters 

expressed support for the proposed rule 

change in its entirety.52 Two 

commenters opposed the proposed rule 

change in its entirety.53 The other 

commenters (including the independent 

financial advisors) generally supported 

the proposed rule change in part, but 

raised concerns about various aspects of 

the proposal. 

In response to the Proceedings Order, 

the Commission received fourteen 

comments.54 Of these comments, four 

supported the proposal,55 three opposed 

the proposal,56 and the remainder 

partially supported or opposed aspects 

of the proposal.57

A. Permanent Classification of Industry 

Employees as Non-Public Arbitrators 

In general, the proposal would result 

in the permanent classification (or 

reclassification of current public 

arbitrators) of individuals who worked 

in the financial industry (a) in any 

capacity, (b) at any point, and (c) for any 

duration, (‘‘Industry Affiliates’’) as nonpublic arbitrators. Many commenters 

opposed the permanent classification of 

Industry Affiliates as non-public 

arbitrators for varying reasons.58

1. Elimination of the Cooling-Off Period 

In general, the proposal would result 

in the classification (or reclassification 

of current public arbitrators) of 

individuals as non-public arbitrators 

who otherwise would have been 

classified as public arbitrators. 

Specifically, individuals who worked in 

the financial industry for any duration 

would be permanently classified as nonpublic arbitrators (effectively 

eliminating the five-year cooling-off 

period).59

Several commenters supported this 

provision as providing a workable 

‘‘bright-line’’ test that would address 

criticism regarding bias (perceived or 

actual) in favor of the financial 

industry,60 including one that stated 

that eliminating the five-year cooling-off 

period would eliminate industry-side 

potential and perceived bias.61

Many commenters opposed 

eliminating the five-year cooling-off 

period for Industry Affiliates.62 Some of 

these commenters expressed concern 

that eliminating the cooling-off period 

could exclude arbitrators with industry 

experience who could be useful on a 

panel to, among other things, educate 

the other panelists on industry 

practice.63 Another commenter 

suggested that FINRA classify Industry 

Affiliates as neither public nor nonpublic arbitrators for a set number of 

years following the date they end their 

affiliation with the financial industry.64

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adopt a cooling-off period for industry employees 

that would be proportional to the number of years 

they were Industry Affiliates). 

65See Friedman October Letter. 

66See FINRA September Letter. 

67 Id. 

68See FINRA November Letter; see also FINRA 

September Letter. 

69See FINRA November Letter; see also FINRA 

September Letter. 

70See FINRA November Letter; see also FINRA 

September Letter. 

71See FINRA September Letter. 

72See FINRA September Letter and FINRA 

November Letter. 

73See Stephens Letter, FSI Letter, Getman Letter, 

and Vernon Letter. 

74See Stephens Letter. 

75See Vernon Letter (expressing concern that 

under the proposal [the commenter] could be 

characterized as a non-public arbitrator based solely 

on his capacity as a ‘‘trainee’’ for Merrill Lynch in 

1983). 

76See FINRA September Letter. 

77See FINRA November Letter. 

78See FINRA September Letter and FINRA 

November Letter. 

79See proposed new Rule 12100(p)(3). 

80See Caruso October Letter, Bakhtiari October 

Letter, Gitomer November Letter, SIFMA November 

Letter, AIG Letter, FSI Letter, Bethel Letter, and 

SIFMA July Letter. The commenters who used the 

Type A Letter also supported this provision. 

81See SIFMA November Letter and AIG Letter. 82See SIFMA November Letter; see also SIFMA 

July Letter (stating that the proposal ‘‘strike[s] an 

appropriate balance in the interests of fairness, 

perceptions of fairness, and arbitrator neutrality for 

all parties’’). 83See AIG Letter. 

84See SIFMA November Letter. 

85See Bender Letter, Friedman October Letter, 

SAC October Letter, UMIRC Letter, GSU Letter, 

CSLC Letter, NASAA November Letter, PIRC 

Second November Letter, NASAA July Letter, 

PIABA Letter, Stephens Letter, PIRC July Letter, 

Bacine Letter, Mass Letter, Hardiman Letter, and 

Friedman July Letter. 

86See, e.g., CSLC Letter and NASAA November 

Letter; see also NASAA July Letter (arguing that 

FINRA should classify as non-public arbitrators 

only persons ‘‘representing or providing services to 

non-retail parties in disputes concerning 

investment accounts or transactions, or 

employment relationships within the financial 

industry’’), Stephens Letter (arguing that FINRA 

should only classify as non-public arbitrators 

persons ‘‘. . . representing or providing services to 

parties in disputes [other than customers] 

concerning investment accounts . . .’’), and Bacine 

Letter (arguing that the distinction between public 

and non-public arbitrators has always been based 

on whether the arbitrators had industry experience 

and argued for keeping this distinction). 

87See, e.g., CSLC Letter, NASAA July Letter, and 

PIABA Letter. 

88See Friedman October Letter. 

This commenter also opposed 

categorizing any industry employee, 

regardless of capacity, as a non-public 

arbitrator. For example, this commenter 

suggested that industry employees who 

are clerical should be classified as 

neither public nor non-public 

arbitrators.65

In its response, FINRA disagreed with 

the opposing commenters, stating that 

its constituents agreed that any cooling 

off period for financial industry 

employees would ‘‘leave a perception of 

unfairness for some advocates.’’ 66 In 

addition, FINRA stated that investor 

advocates have a stated preference for 

using expert witnesses and making their 

own arguments rather than relying on 

members of the arbitration panel that 

have industry experience to explain and 

influence matters.67 FINRA also stated, 

however, that former industry 

employees have valuable knowledge 

and experience, and that completely 

removing them from arbitrator service 

would negatively impact the forum.68

Similarly, FINRA stated that if an 

Industry Affiliate meets FINRA’s 

qualifications for service as an arbitrator 

(regardless of the capacity in which she 

or he served the financial industry), she 

or he should be classified as a nonpublic arbitrator.69 FINRA stated that 

parties to an arbitration would continue 

to have the authority to strike any or all 

arbitrators on the non-public list.70

Ultimately, FINRA stated that it 

believes that it is more workable to use 

a bright-line test than a pro rata coolingoff period for financial industry 

employees.71 Accordingly, FINRA 

declined to amend the proposed rule 

change.72

2. All Employees, Regardless of 

Capacity, To Be Classified as NonPublic Arbitrators 

Four commenters stated that, as 

proposed, the rule would improperly 

characterize certain individuals without 

true financial industry experience as 

non-public arbitrators.73 One of these 

commenters expressed concern that 

individuals performing solely clerical or 

ministerial functions for a financial 

industry firm would be classified as 

non-public arbitrators because they 

would be considered ‘‘associated 

persons’’ as defined by Rule 12100(p).74

Accordingly, this commenter suggested 

FINRA amend the definition of the term 

‘‘associated person’’ in the proposal to 

track the definition of the term 

‘‘associated person’’ in section 3(a)(18) 

of the Act, which excludes individuals 

performing solely clerical or ministerial 

functions. Another commenter 

suggested that the proposal should only 

classify individuals who ‘‘worked for [a 

financial industry firm] in a capacity for 

which testing and registration is 

required’’ as non-public arbitrators to 

address this concern.75

In its response, FINRA stated that its 

staff believes that ‘‘investor concerns 

about the neutrality of the public roster 

apply to all industry employees, 

including those who serve in clerical or 

ministerial positions.’’ 76 In addition, 

FINRA stated that it believes that if a 

financial industry affiliate meets 

FINRA’s qualifications for service as an 

arbitrator, FINRA should appoint the 

person to the non-public arbitrator 

roster.77 Accordingly, FINRA declined 

to amend the proposed rule change.78

B. Classification of Professionals 

1. Classifying Investor Advocates as 

Non-Public Arbitrators 

In general, the proposed rule change 

would classify attorneys, accountants, 

expert witnesses, or other professionals 

who (a) devote 20 percent or more of 

their professional time (b) in any single 

calendar year within the past five 

calendar years (c) to representing or 

providing services to parties in disputes 

concerning investment accounts or 

transactions, or employment 

relationships within the industry 

(‘‘Investor Advocates’’) as non-public 

arbitrators.79 Currently, individuals 

meeting this description are classified as 

public arbitrators. 

Several commenters supported this 

provision,80 including two commenters 

that indicated that this provision is 

necessary to eliminate potential and 

perceived investor-side bias.81

Specifically, one of these commenters 

stated that the rationale for eliminating 

perceived bias is the same for both 

public and non-public arbitrators.82

Another commenter stated that 

eliminating perceived investor-side bias 

is necessary in light of the 

implementation of the all-public-panel 

rule.83 Similarly, one commenter noted 

that the historical distinction of 

classifying arbitrators as pubic 

arbitrators based on their financial 

industry experience was compelling 

when FINRA required the presence of 

someone with financial industry 

experience on all panels, but is no 

longer necessary with the advent of the 

all-public-panel rule.84

Several commenters also opposed the 

classification of Investor Advocates as 

non-public arbitrators,85 including some 

commenters who supported the 

classification of industry-affiliated 

persons as non-public arbitrators.86

Many of these commenters stated that 

including investor representatives in the 

public arbitrator pool counteracts some 

of the existing perceived bias in favor of 

the financial industry in the FINRA 

arbitration forum.87 One commenter 

stated that ‘‘[he could not] fathom how 

this [provision] would further investor 

protection.’’ 88 Two other commenters 

stated that there is no evidence 

supporting the assumption that 

professionals who serve the investing 

public have any bias either for or against 

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89See GSU Letter and PIABA Letter. 

90See NASAA November Letter; see also Mass 

Letter (asserting that lawyers who represent 

investors or claimants are public arbitrators because 

they work on behalf of the public at large against 

the financial industry), and Hardiman Letter 

(stating that classifying Investor Advocates as nonpublic arbitrators would be ‘‘burying professionals 

who represent the investing public in the industry 

non-public side’’). 

91See CSLC Letter (citing the NASAA July Letter 

and PIABA Letter) and PIRC Second November 

Letter. 

92See UMIRC Letter. 

93See UMIRC Letter; see also, e.g., Stephens 

Letter, NASAA July Letter, PIABA Letter, PIRC July 

Letter, Bacine Letter (stating that the proposal 

would create confusion since the U.S. courts, the 

American Arbitration Association, and the general 

public generally view professionals who represent 

investors to be ‘‘public arbitrators’’), and PIRC July 

Letter (stating that past NASD response letters, as 

well as the FINRA Web site, also make the 

distinction that professionals who represent 

investors are typically public arbitrators). 

94See Notice of Filing, 79 FR 38080, 38081 (Jul. 

3, 2014); see also FINRA September Letter (stating 

that industry constituents have expressed concern 

about the neutrality of the public arbitrator roster 

because of the presence on the roster of Investor 

Advocates). 

95See FINRA November Letter. 

96 Id. 

97See FINRA September Letter and FINRA 

November Letter. 

98See SIFMA July Letter, PIABA Letter, and 

Berthel Letter. 

99See NASAA July Letter. 

100See FINRA September Letter. 

101 Id. 

102See proposed new Rule 12100(p)(3). 

103See UMIRC Letter and PIRC July Letter. 

104See UMIRC Letter and PIRC July Letter. 

105See PIRC July Letter. 

106See UMIRC Letter. 

107See FINRA November Letter. 

108NAMC provides policy guidance to FINRA 

Dispute Resolution staff. Its members include 

investors, securities industry professionals, and 

FINRA arbitrators and mediators. A majority of 

NAMC’s members and its chair are non-industry 

representatives. See FINRA Advisory Committees, 

National Arbitration and Mediation Committee, 

available at http://www.finra.org/aboutfinra/

leadership/committees/p197363. 

109See FINRA September Letter and FINRA 

November Letter. 

110See FINRA September Letter and FINRA 

November Letter. 

the financial industry.89 Another 

commenter stated that it believes that 

the classification of Investor Advocates 

as non-public arbitrators is inconsistent 

with the concept of a ‘‘public’’ 

arbitrator.90 Two commenters argued 

that there is a perception that the 

arbitration system is unfair or always 

‘‘stacked against’’ investors and that 

‘‘any proposal to change the definitions 

of public and non-public arbitrator 

should be focused on mitigating the 

investing public’s perception of bias, 

not the industry’s perception of bias.’’ 91

Another commenter asserted that the 

‘‘public’’ and ‘‘non-public’’ labels were 

never intended to account for biases in 

favor of the investing public but rather 

to eliminate arbitrators’ perceived and 

actual bias against customers who are 

compelled to participate in this forum 

by the financial industry.92 This 

commenter also argued that the 

proposed new classifications would 

cause confusion because Investor 

Advocates generally represent the 

public and would naturally be 

considered to be associated with the 

‘‘public’’ pool.93

In the Notice of Filing, FINRA stated 

that it proposed the reclassification of 

arbitrator categories in response to 

concerns regarding the neutrality of the 

public arbitrator roster raised by both 

investor representatives and industry 

representatives.94 Similarly, in its 

response FINRA stated that addressing 

both investor and industry perceptions 

of bias in the public arbitrator roster 

would better safeguard the integrity of 

its arbitration forum.95 FINRA also 

stated that parties would continue to 

receive extensive disclosure statements 

on each proposed arbitrator that 

describe in detail that arbitrator’s 

background. Accordingly, FINRA 

believes that under the proposal parties 

in customer cases would be able to 

address their own perceptions of bias 

that may arise under the proposal 

through the use of their unlimited 

strikes on the list of non-public 

arbitrators.96 Thus, FINRA declined to 

amend the proposed rule change.97

2. Five-Year Cooling-Off Period for 

Professionals Representing Industry 

In general, the proposed rule change 

would extend the cooling-off period 

from two years to five years for 

attorneys, accountants, expert 

witnesses, or other professionals who (a) 

devote 20 percent or more of their 

professional time (b) in any single 

calendar year within the past five 

calendar years (c) to representing or 

providing services to financial industry 

firms (‘‘Industry Advocates’’). 

Three commenters generally 

supported this provision as fair and 

acknowledged the consistency of 

approach towards professionals 

representing investors and those 

representing industry.98 Another 

commenter generally supported 

removing Industry Advocates from the 

public arbitrator roster, but believed that 

they should be permanently classified 

as non-public arbitrators like financial 

industry employees (i.e., the commenter 

suggested that FINRA eliminate the 

cooling-off period rather than extend 

it).99

In its response, FINRA stated that it 

has drawn a distinction between 

individuals who work in the financial 

industry and individuals who provide 

services to the financial industry. 

FINRA also stated its belief that to help 

ensure fairness to all forum users, it 

needed to take a consistent approach to 

cooling-off periods for service providers 

to both investors and the financial 

industry.100 Accordingly, FINRA 

declined to amend the proposed rule 

change.101

3. Using Professional Time To Quantify 

Professional Work 

As stated above, the proposal would 

classify attorneys, accountants, expert 

witnesses, or other professionals as 

either public arbitrators or non-public 

arbitrators depending on, among other 

things, the percentage of time those 

individuals devoted to representing 

either the financial industry or 

investors.102 Some commenters 

questioned the appropriateness of 

classifying individuals as public or nonpublic arbitrators based on the ‘‘amount 

of time’’ an individual devotes to a 

client.103 Alternatively, commenters 

suggested using revenue instead of 

professional time as the metric to 

quantify professional work.104 One of 

these commenters suggested that 

revenue is a better measurement since 

not all professionals track their work in 

terms of time, but all professionals 

would have a record of revenue.105

Another one of these commenters stated 

that using professional time as the 

metric would categorize professors and 

supervisors in investor advocacy clinics 

as non-public arbitrators, even though 

the clinic does not earn any revenues 

and the primary function of the clinic is 

educational.106

In its response, FINRA stated that 

given the purpose of the proposal is to 

address the perception that 

professionals who regularly provide 

services to investors might be biased in 

favor of investors, it does not believe 

that it would be appropriate to make an 

exception for employees of law school 

investor advocacy clinics.107 FINRA 

also stated that the proposed rule 

change regarding ‘‘professional time’’ 

was specifically discussed by its 

National Arbitration and Mediation 

Committee (‘‘NAMC’’) 108 and it agreed 

that the change ‘‘added clarity to the 

rule text, was simpler to apply, and 

would result in more accurate 

calculations by arbitrator applicants and 

arbitrators reviewing their business 

mix.’’ 109 Accordingly, FINRA declined 

to amend the proposed rule change.110

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111See Exchange Act Release No. 70442 (Sept. 18, 

2013), 78 FR 58580 (Sept. 24, 2013) (order 

approving a proposed rule change to, among other 

things, permit all parties to select an all-public 

panel) and Exchange Act Release No. 63799 (Jan. 

31, 2011), 76 FR 6500 (Feb. 4, 2011) (order 

approving a proposed rule change to provide 

customers with the option to choose an all-public 

panel in all cases). 

112See UMIRC Letter (citing Exchange Act 

Release No. 69762 (Jun. 13, 2013), 78 FR 37267, 

37268 (Jun. 20, 2013) (Notice of Filing of Proposed 

Rule Change Relating to Amendments to the Code 

of Arbitration Procedure for Customer Disputes 

Concerning Panel Composition)). 113See SAC October Letter. 114See, e.g., Bender Letter, PIRC First November 

Letter, GSU Letter, SAC October Letter, Friedman 

October Letter, UMIRC Letter, Friedman July Letter, 

SAC July Letter, NASAA July Letter, and FSI Letter. 

115See SAC July Letter and NASAA July Letter. 

116 In the FINRA September Letter, FINRA 

estimated that 374 arbitrators would be reclassified 

from public to non-public arbitrators as a result of 

having had a Central Registration Depository 

(‘‘CRD’’) number at some point in their careers or 

having had an affiliation with a firm with a CRD 

number. In addition, FINRA estimated that 

approximately 100 arbitrators would be reclassified 

from public to non-public as a result of having 

identified an affiliation with PIABA; see also 

FINRA November Letter. 

117See FINRA November Letter (basing its 

estimate on a survey of databases to which FINRA 

has access); see also FINRA September Letter. 

118See Bender Letter, SAC October Letter, UMIRC 

Letter, PIRC November Letter, and GSU Letter. 

119See Bender Letter and SAC October Letter. 

120See SAC October Letter and UMIRC Letter; see 

also FSI Letter. 

121See SAC October Letter and UMIRC Letter; see 

also SAC July Letter (suggesting that the potential 

shortage of public arbitrators may be more 

concentrated in some locations than others). 

122See FINRA November Letter. 

123See FINRA November Letter and FINRA 

December Letter; see also FINRA September Letter. 

124See FINRA November Letter and FINRA 

December Letter (collectively citing, for example, 

the Puerto Rico bond fund disputes for which 

FINRA stated that its staff conducted recruitment 

activities in Puerto Rico and asked arbitrators in 

hearing locations in the Southeast Region and Texas 

if they would be willing to serve in Puerto Rico. 

FINRA stated that its recruitment efforts have 

resulted in almost 200 applications from Puerto 

Rico residents to serve on its roster, and 

approximately 800 arbitrators currently on its roster 

who have agreed to hear cases in Puerto Rico). 

125See Exchange Act Release No. 73245 (Sept. 29, 

2014), 79 FR 58976 (Oct. 3, 2014) (Order Approving 

Proposed Rule Change to Amend the Code of 

Arbitration Procedure for Customer Disputes and 

the Code of Arbitration Procedure for Industry 

Disputes to Increase Arbitrator Honoraria and 

Increase Certain Arbitration Fees and Surcharges). 

126See FINRA September Letter, FINRA 

November Letter, and FINRA December Letter. 127See FINRA December Letter; see also FINRA 

September Letter (stating that if the proposal was 

approved, it would conduct a more detailed 

analysis to determine whether additional arbitrator 

recruitment efforts were necessary in any particular 

geographic area and would deploy the necessary 

resources to avoid any undue delay in the 

arbitration process). 

128See FINRA September Letter and FINRA 

November Letter. 

129See, e.g., Bender Letter, PIRC First November 

Letter, GSU Letter, and SAC October Letter. 

130See, e.g., Bender Letter, PIRC First November 

Letter, GSU Letter, and SAC October Letter. 

131See Bender Letter. 

132See PIRC First November Letter. 

4. Impact to the Pool of Public 

Arbitrators 

a. Number of Available Public 

Arbitrators 

Since February 1, 2011, customers 

have been able to choose an arbitration 

panel composed entirely of public 

arbitrators (i.e., an ‘‘all-public 

panel’’).111 One commenter cited 

statistics that indicated that customers 

in approximately three-quarters of 

eligible cases choose an all-public 

panel.112 Another commenter estimated 

that public arbitrators account for 

approximately 85% of those that 

serve.113 Consequently, several 

commenters expressed concern that the 

proposed rule change would negatively 

impact the number of public arbitrators 

available to serve in FINRA’s arbitration 

forum.114 Similarly, some commenters 

suggested that under the proposed rule 

change FINRA would need to devote 

resources to recruit additional public 

arbitrators.115

Several commenters questioned 

FINRA’s estimate that the total number 

of arbitrators that would be reclassified 

from public arbitrators to non-public 

arbitrators would be approximately 

474 116 out of 3,567 current public 

arbitrators (approximately 13.3%).117 A 

number of commenters stated that they 

believe that FINRA severely 

underestimated the number of 

arbitrators that would be reclassified.118

Some commenters estimated that the 

number of public arbitrators that would 

be reclassified is approximately onefourth or 25% of the current public 

arbitrator pool.119 Consequently, 

commenters expressed concern that the 

proposal would result in delays in 

arbitration proceedings due to an 

insufficient number of arbitrators.120

Two commenters cited the recent stay in 

arbitration proceedings in Puerto Rico 

as an example of the possible outcome 

if the pool of public arbitrators is 

drastically reduced in some geographic 

areas.121

In its response, FINRA acknowledged 

commenters’ concerns about reducing 

the number of public arbitrators 

currently on the public arbitrator roster. 

FINRA also stated, however, that it 

believes that addressing users’ 

perceptions of the neutrality of its 

public arbitrators outweighs those 

concerns.122 In addition, FINRA stated 

that it intends to address commenters’ 

concerns as well, stating its 

commitment to aggressively recruiting 

arbitrators to help ensure that ‘‘the 

forum has a sufficient number of public 

arbitrators to serve the needs of forum 

users in each of its hearing 

locations.’’ 123 Specifically, FINRA 

illustrated its ongoing efforts to recruit 

public arbitrators since the adoption of 

the all-public panel rule.124 In addition, 

FINRA expressed its commitment to 

arbitrator retention, citing its recent rule 

proposal to increase the amount of 

honoraria arbitrators receive in 

connection with serving on a panel.125

In its response, FINRA concluded that 

despite the temporary decrease in the 

number of public arbitrators resulting 

from the proposed rule change, the 

FINRA forum will have a sufficient 

number of public arbitrators to serve the 

immediate needs of forum users.126 In 

addition, FINRA stated that if the 

proposal was approved it would focus 

its recruiting efforts on the hearing 

locations most impacted by the rule 

change and that it would assign 

additional staff to recruitment as 

necessary.127 Accordingly, FINRA 

declined to amend the proposed rule 

change.128

b. Quality of Public Arbitrator Pool 

Several commenters expressed 

concern that the proposed rule change 

would negatively impact the quality of 

public arbitrators available to serve in 

FINRA’s arbitration forum.129 In 

particular, these commenters were 

concerned that the classification of 

Investor Advocates as non-public 

arbitrators would diminish the number 

of qualified public arbitrators.130 For 

example, one commenter stated that the 

proposal would result in the most 

highly trained public arbitrators for 

customer-member cases being 

reclassified as non-public arbitrators.131

Another commenter stated more 

generally that the proposal would ‘‘gut 

the public arbitrator pool of many 

experienced and knowledgeable 

arbitrators’’ and result in a ‘‘brain drain’’ 

of the public arbitrator pool.132

In its response, FINRA stated that the 

proposed rule change would not reduce 

the total number of arbitrators available 

for selection but rather would shift them 

to another part of the roster. 

Accordingly, FINRA stated that it does 

not believe that the proposed rule 

change would drain from the forum the 

experience and expertise of those 

arbitrators being reclassified as nonpublic. FINRA stated that instead, the 

parties would receive a complete 

description of the background and 

experience of each arbitrator on the nonpublic list and could use that 

information to rank or strike them 

accordingly. FINRA stated that the 

proposal would effectively maintain the 

reclassified individuals in the pool of 

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133See FINRA November Letter. 

134See FINRA November Letter and FINRA 

December Letter. 

135See FINRA December Letter. 

136See FINRA November Letter. 

137See Stephens Letter and Bacine Letter 

(expressing concern that classifying professionals 

who provide services to customers as non-public 

arbitrators would negatively impact the quality of 

chairman-eligible arbitrators); see also Bender 

Letter. 

138See Bacine Letter and Berthel Letter. 

139See FINRA September Letter. 

140 Id. 

141 Id. 

142See SAC July Letter, Friedman July Letter, 

Estell Letter, Friedman October Letter, PIRC First 

November Letter, and SAC October Letter 

(questioning whether the depletion of public 

arbitrators resulting from the proposed rule change 

would lead to delays in hearing claims). 

143See FINRA September Letter. 

144See, e.g., SAC October Letter and PIRC First 

November Letter. 

145See SAC October Letter and PIRC First 

November Letter. 

146See SAC October Letter; see also Estell Letter 

(suggesting that FINRA make information about 

each arbitrator publicly available, particularly to 

academic researchers, and that the data could 

provide FINRA with statistical proof of bias or lack 

of bias upon which to base its proposal instead of 

relying on perceptions of bias). 

147See FINRA November Letter; see also FINRA 

September Letter. 

148See FINRA November Letter; see also FINRA 

September Letter. 

149See FINRA September Letter. 

150See FINRA November Letter and FINRA 

December Letter; see also FINRA September Letter. 

151See FINRA September Letter. 

152See Friedman October Letter, SAC October 

Letter, and PIRC November Letter. 

153See SAC October Letter; see also Friedman 

July Letter and SAC July Letter (expressing concern 

that a decrease in the number of public arbitrators 

could result in greater delays in arbitrating claims, 

particularly (1) during declines in the financial 

markets (when the number of arbitration claims 

filed increases) or (2) in certain hearing locations 

with smaller rosters of arbitrators). 

154See Friedman October Letter, SAC October 

Letter, SAC July Letter, and Friedman July Letter. 

155See SIFMA November Letter. 

156 Id. 

157See FINRA November Letter. 

158See FINRA November Letter and FINRA 

December Letter. 

159See FINRA News Release, FINRA Announces 

Arbitration Task Force (Jul. 17, 2014), available at 

http://www.finra.org/Newsroom/NewsReleases/

2014/P554192 (announcing the formation of an 

Arbitration Task Force to consider possible 

enhancements to improve transparency, 

Continued 

arbitrators as non-public arbitrators to 

be able to continue to utilize their 

experience and expertise while 

eliminating the industry’s perception of 

bias of these arbitrators.133 In addition, 

FINRA acknowledged the need for 

aggressive arbitrator recruitment to help 

ensure that the forum has a sufficient 

number of qualified public 

arbitrators 134 and outlined the measures 

it intends to undertake to fulfill this 

objective.135 Accordingly, FINRA 

declined to amend the proposed rule 

change.136

5. Impact on Qualified Chairpersons 

Several commenters expressed 

concern that the proposed rule change 

would negatively impact the quantity 

and quality of chairpersons available to 

serve in FINRA’s arbitration forum.137

Some commenters suggested changes to 

the qualification requirements for 

chairpersons in customer cases, such as 

allowing arbitrators with investor 

relationships to serve as chairpersons or 

requiring that the chairperson be a judge 

or hold a law degree.138

In its response, FINRA stated that 

allowing arbitrators with investor 

relationships to serve as chairpersons 

would nullify the effort to address 

perceived bias.139 FINRA also noted that 

more than 75 percent of the public 

chair-qualified arbitrators are attorneys 

and therefore stated that it does not 

believe that changes to the chair 

qualifications are necessary.140

Accordingly, FINRA declined to amend 

the proposed rule change.141

6. Cost-Benefit Analysis 

a. Timing 

Several commenters stated that the 

proposed rule change should not be 

approved until FINRA obtained 

additional data and published a detailed 

cost-benefit analysis justifying the 

proposal.142 In particular, these 

commenters expressed concern with 

FINRA’s commitment 143 to perform a 

detailed cost-benefit analysis after the 

proposal was implemented in order to 

assess its impact and determine where 

to allocate additional resources for 

arbitrator recruitment.144 Two of these 

commenters stated that if FINRA 

ultimately finds the impact of the 

proposed rule change unsupportable, 

forum participants would have to 

comply with a ‘‘bad’’ rule while 

proceedings are pending to approve a 

subsequent rule change.145 One of these 

commenters also stated that if the effort 

to conduct a cost-benefit analysis is to 

be expended in any event, conducting it 

prior to implementing the proposal 

could streamline implementation of the 

proposed rule change.146

In its response, FINRA stated that a 

cost-benefit analysis, while useful for 

planning purposes, does not outweigh 

the imperative of addressing the users’ 

perception of neutrality in maintaining 

the integrity of the forum, and that 

fairness requires FINRA to address the 

concerns of all forum users.147 Further, 

FINRA noted that the ‘‘proposed rule 

change is the culmination of extensive 

dialogue with FINRA constituents and 

FINRA filed the proposed rule change at 

the urging of its constituents.’’ 148 In 

addition, FINRA stated that performing 

a cost-benefit analysis would be timeintensive and require a survey of every 

public arbitrator on its roster.149 In the 

interim, FINRA performed a preliminary 

analysis of databases currently available 

to it to obtain estimates of the potential 

impact of the proposal (discussed 

above).150 FINRA also committed to 

perform a cost-benefit analysis if the 

proposal is approved.151

b. Potential Forum Delays 

Three commenters stated that by 

failing to conduct an in-depth analysis 

of the impact of the proposed rule 

change, FINRA failed to weigh the 

consequences of its actions.152 For 

example, one commenter suggested that 

FINRA may not currently have enough 

public arbitrators and that this shortage 

of public arbitrators may be contributing 

to an increase in overall case 

turnaround time.153 Similarly, two 

commenters identified the lack of a costbenefit analysis as a reason that FINRA 

has underestimated the potential impact 

of the proposal on the public arbitrator 

pool.154

Alternatively, one commenter stated 

that FINRA’s representations that the 

proposal would not affect a significant 

number of arbitrators are sufficient.155

This commenter also stated that even if 

the impact to the public arbitrator pool 

is greater than anticipated, it is a small 

price to pay for arbitrator neutrality.156

In its response, FINRA stated that it 

monitors the amount of time it takes to 

process a claim in its forum and has not 

heard from forum users that arbitrator 

availability is causing delays in 

processing cases. Instead, FINRA stated 

that various other factors are more likely 

to result in delays, including partyinitiated postponements; an increase in 

the number of hearing sessions per case; 

concentration of law firms representing 

the majority of parties; and efforts to 

verify arbitrators’ disclosures to protect 

parties from undisclosed arbitrator 

conflicts.157 Moreover, as discussed 

above, FINRA stated that it recognizes 

the need for aggressive arbitrator 

recruitment to address any potential 

impact and outlined the steps it expects 

to take in its aggressive recruitment and 

retention of public arbitrators.158

7. Consideration of the Proposal by 

FINRA’s Dispute Resolution Task Force 

Two commenters suggested that 

FINRA withdraw the proposal and 

submit it to its recently formed 

Arbitration Task Force 159 for 

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impartiality and efficiency of FINRA’s securities 

arbitration forum for all participants). 160See Friedman October Letter and SAC October 

Letter; see also Friedman July Letter. 161See SAC October Letter. 162See FINRA November Letter; see also FINRA 

September Letter. 163See FINRA November Letter; see also FINRA 

September Letter. 164See FINRA November Letter. 165See FINRA September Letter and FINRA 

November Letter. 166See Bender Letter, NASAA November Letter, 

PIRC First November Letter, Friedman July Letter, 

and Nicinski Letter. 

167See Bender Letter and PIRC First November 

Letter; see also Estell Letter. 

168See PIRC First November Letter; see also 

Nicinski Letter. 

169See Friedman October Letter; see also 

Friedman July Letter (suggesting that instead of 

public and non-public, arbitrators should be 

classified as affiliated with financial industry or 

not). 

170See AAJ Letter, Estell Letter, and NASAA 

October Letter. 

171See, e.g., Nicinski Letter (recommending that 

arbitrators be required to display some knowledge 

of the investment products likely to be discussed 

during an arbitration) and Berthel Letter 

(recommending (1) that every panel include 

arbitrators with a strong background in securities 

laws and (2) that the Chair be a judge or hold a law 

degree). 

172See FINRA September Letter and FINRA 

November Letter. 

173See FINRA September Letter and FINRA 

November Letter; see also supra note 109. 

174See FINRA September Letter. 

175See FINRA September Letter and FINRA 

November Letter. 

176 In approving this proposed rule change, the 

Commission has considered the proposed rule 

change’s impact on efficiency, competition, and 

capital formation. See 15 U.S.C. 78c(f). 

177 15 U.S.C. 78o–3(b)(6). 

178See infra pp. 41–42 for a discussion of other 

provisions of the proposed rule change. 

179See Notice of Filing, 79 FR 38080, 38081 (Jul. 

3, 2014). 

180See SIFMA November Letter and CSLC Letter; 

see also SIFMA July Letter, Aidikoff Letter, 

Bakhtiari July Letter, NASAA July Letter, and 

PIABA Letter. 

181See SIFMA November Letter and AIG Letter; 

see also SIFMA July Letter, FSI Letter, Berthel 

Letter, and Type A Form Letters; but see Friedman 

October Letter, UMIRC Letter, GSU Letter, CSLC 

Letter, NASAA November Letter, Second PIRC 

November Letter, NASAA July Letter, PIABA Letter, 

Stephens Letter, PIRC July Letter, Bacine Letter, 

Mass Letter, Hardiman Letter, and Friedman July 

Letter. 

consideration.160 One of these 

commenters suggested that the Task 

Force should be permitted to consider 

the proposal after a full impact analysis 

is conducted so that the Task Force 

would have the benefit of this analysis 

for its consideration.161

In its response, FINRA stated that it 

has engaged in a comprehensive process 

soliciting input from interested 

groups.162 It also stated that the 

proposal reflects a balanced approach 

on classifying arbitrators that would 

enhance forum users’ perception of 

fairness of the forum.163 In addition, 

FINRA stated that while the Task Force 

is setting its own agenda and is free to 

discuss the arbitrator definitions, it does 

not expect to make any 

recommendations until the fall of 2015, 

which would make it unlikely for 

FINRA to file any proposed rule change 

based on Task Force recommendations 

until at least 2016.164 FINRA indicated 

that it does not believe that it would be 

in the best interests of forum users to 

delay action on this fully considered 

proposal.165

8. Alternative Solutions 

Several commenters suggested 

alternatives to the proposal.166 For 

example, two commenters suggested 

that FINRA require arbitrators to 

disclose additional information about 

themselves, including their mix of work 

and the percentage of revenue derived 

from representation for or against the 

financial industry, so that parties can 

make independent determinations about 

each arbitrator.167 One of these 

commenters also suggested that FINRA 

eliminate the labels of public and nonpublic altogether and allow parties to 

choose from a single pool of 

arbitrators.168 Another commenter 

stated that Industry Affiliates should not 

permanently remain classified as nonpublic arbitrators but rather should be 

reclassified as being precluded from 

acting as an arbitrator in any capacity 

(i.e., a ‘‘no-man’s land’’) for a number of 

years after ceasing their respective 

affiliation with the financial industry.169

Three other commenters objected to 

broker-dealers’ use of pre-dispute 

mandatory arbitration agreements.170

Other commenters suggested ways to 

improve the quality of arbitration 

panels.171

As discussed above, FINRA stated 

that it has engaged in a robust review 

process, including consultation with its 

NAMC, interested groups, and other 

forum constituents, during which it 

encouraged interested persons to raise 

their concerns about the definitions and 

to make suggestions on how to improve 

them.172 FINRA stated that its NAMC 

did not recommend that FINRA 

eliminate the arbitrator 

classifications.173 In addition, FINRA 

stated that eliminating the arbitrator 

classifications would undermine many 

of its recent changes to arbitrator 

selection rules, notably its all-public 

panel rule, which have been positively 

received by parties. In addition, FINRA 

stated that the recommended 

alternatives were either outside the 

scope of, or would cause undue delay 

to, the proposed rule change.174

Accordingly, FINRA declined to amend 

the proposed rule change.175

IV. Discussion 

The Commission has carefully 

considered the proposed rule change, 

the comments received, and FINRA’s 

responses to the comments. Based on its 

review of the record, the Commission 

finds that the proposal is consistent 

with the requirements of the Act and the 

rules and regulations thereunder 

applicable to a national securities 

association.176 In particular, the 

Commission finds that the proposal is 

consistent with section 15A(b)(6) of the 

Act, which requires, among other 

things, that FINRA’s rules 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.177

As stated above, FINRA classifies 

arbitrators as ‘‘non-public’’ or ‘‘public’’ 

based on their professional and personal 

affiliations. 

The proposal would, among other 

things: (1) Permanently classify as ‘‘nonpublic arbitrators’’ individuals with 

certain affiliations with the financial 

industry; and (2) classify as non-public 

arbitrators certain professionals (e.g., 

accountants and attorneys) who 

represent or provide services to parties 

in disputes concerning investment 

accounts or transactions, or employment 

relationships within the financial 

industry.178 Consequently, the proposed 

rule change would, in some instances, 

require the reclassification of current 

public arbitrators to non-public 

arbitrators. 

As stated in the Notice of Filing, the 

proposed rule change was designed to 

address concerns regarding the 

perceived neutrality of the public 

arbitrator roster raised by both investor 

representatives and financial industry 

representatives.179 Specifically, the 

classification of individuals affiliated 

with the financial industry as nonpublic arbitrators responds to concerns 

of potential bias of arbitrators, whether 

actual or perceived, in favor of the 

industry.180 Similarly, the classification 

of Investor Advocates as non-public 

arbitrators responds to concerns of 

potential bias of arbitrators, whether 

actual or perceived, in favor of 

investors.181

The Commission believes that the 

proposed rule change would help to 

address any perceived bias of public 

arbitrators by classifying certain 

individuals with either financial 

industry experience or significant 

experience representing investors as 

non-public arbitrators. Accordingly, the 

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182See, e.g., CSLC Letter, NASAA November 

Letter, NASAA July Letter, PIABA Letter, Stephens 

Letter, PIRC July Letter, Bacine Letter, Friedman 

July Letter, Hardiman Letter, and Mass Letter. 

183See FINRA September Letter, FINRA 

November Letter, and FINRA December Letter. 

184See, e.g., Bender Letter, PIRC First November 

Letter, GSU Letter, SAC October Letter, SAC July 

Letter, and NASAA July Letter. 

185See FINRA November Letter and FINRA 

December Letter. 

186See FINRA November Letter and FINRA 

December Letter. 

187See FINRA November Letter and FINRA 

December Letter. 

188See FINRA September Letter and FINRA 

December Letter. 

189See FINRA November Letter and FINRA 

December Letter. 

190See supra note 125. 

191See, e.g., FINRA December Letter; see also 

Exchange Act Release No. 74289 (Feb. 18, 2015), 80 

FR 9773 (Feb. 24, 2015) (Notice of Filing of a 

Proposed Rule Change to Amend the Codes of 

Arbitration Procedure to Increase the Late 

Cancellation Fee) (FINRA proposed rule change to 

amend Rules 12214 and 12601 of the Customer 

Code and Rules 13214 and 13601 of the Industry 

Code to require, among other things, that parties 

give more advance notice before cancelling or 

postponing a hearing, or be assessed a higher late 

cancellation fee if such notice is not provided). 

192See FINRA November Letter. 

193See Friedman October Letter, PIRC First 

November Letter, and SAC October Letter; see also 

SAC July Letter and Friedman July Letter. 

194See Friedman October Letter and SAC October 

Letter; see also Friedman July Letter. 

195See FINRA September Letter, FINRA 

November Letter, and FINRA December Letter. 

Commission also believes that the 

proposal would enhance the perception 

of neutrality of the entire FINRA 

arbitration forum. The Commission 

recognizes commenters’ concerns that 

classifying Investor Advocates as nonpublic investors may be inconsistent 

with their historic view of non-public 

and public arbitrators (i.e., classifying 

public arbitrators and non-public 

arbitrators based on their affiliations (or 

lack thereof) with the financial 

industry).182 The Commission also 

recognizes, however, that the public 

interest would be served by addressing 

concerns of fairness and neutrality for 

all forum users.183

The Commission also recognizes the 

concerns of some commenters that the 

proposed rule change would require 

FINRA to reclassify some current public 

arbitrators as non-public arbitrators and 

that these reclassifications may 

temporarily reduce the number and 

quality of the public arbitrator pool, 

particularly in light of the 

implementation of FINRA’s all-publicpanel rules.184 The Commission, 

however, also recognizes FINRA’s 

current and proposed future efforts to 

help ensure the sufficiency of the public 

arbitrator pool.185

Although FINRA stated that it 

currently anticipates having a sufficient 

number of public arbitrators to serve the 

immediate needs of forum users, it also 

acknowledged that the proposal may 

necessitate aggressive arbitrator 

recruitment.186 Accordingly, FINRA 

stated that it is committed to help 

ensure that the forum has a sufficient 

number of public arbitrators to serve the 

needs of its forum members in each of 

its hearing locations.187 For example, 

FINRA stated that it intends to conduct 

a detailed survey of its public arbitrators 

as part of an impact analysis to assist in 

allocating its resources to recruit public 

arbitrators in the areas most needed.188

In addition, FINRA stated that it intends 

to devote its resources to recruiting 

arbitrators.189

Furthermore, FINRA stated that it has 

taken steps to enhance arbitrator 

retention. For example, FINRA stated 

that it has implemented a new rule to 

increase the amount of honoraria paid to 

its arbitrators.190 In addition, FINRA 

stated that it intends to increase the 

amount of honoraria paid to arbitrators 

when a party or parties postpone or 

cancel hearing sessions on short 

notice.191

While FINRA acknowledges that the 

proposed rule change will necessitate 

aggressive arbitrator recruitment to help 

ensure that its arbitration forum will 

continue to have sufficient public 

arbitrators to prevent delays in all 

hearing locations,192 the Commission 

preliminarily believes that FINRA’s plan 

to mitigate such delays is appropriate, 

particularly in light of the primary 

objective of the proposal—improving 

the perceived neutrality of its arbitrators 

and integrity of its arbitration forum. 

In sum, the Commission believes that 

the proposed rule change would help 

address forum users’ perceptions of 

neutrality in, and maintain the integrity 

of, the arbitration forum. In addition, 

the Commission believes the potential 

negative effects (in particular, a 

temporary decline in the number of 

available public arbitrators) will be 

mitigated by FINRA’s proposed 

recruitment and retention of public 

arbitrators. 

The proposed rule change would also: 

(1) Extend the cooling off period for 

Industry Affiliates and Investor 

Advocates to five years, and (2) use 

professional time to quantify 

professional work when determining 

whether a person qualifies as an 

Industry Affiliate or Investor Advocate. 

Although some commenters suggested 

alternatives, such as proportional 

cooling off periods or using revenue, 

instead of professional time, to quantify 

professional work, FINRA stated its 

belief that a bright-line test is more 

workable and eases administrative 

burdens while addressing concerns 

about potential or perceived bias in the 

forum. 

In addition to the amendments 

discussed above, the proposed rule 

change would make several additional 

changes to the Codes. For instance, the 

proposal would (1) add new categories 

of financial industry personnel who 

would be classified as non-public 

arbitrators, in particular persons 

associated with, including registered 

through, a mutual fund or hedge fund 

and persons associated with, including 

registered through, an investment 

adviser; (2) reduce from 20 to 15, the 

number of years a person must work 

over the course of his or her career in 

specified capacities in order to be 

permanently classified as a non-public 

arbitrator; and (3) redefine the definition 

of ‘‘immediate family member’’ as well 

as add a two year cooling off period for 

individuals whose immediate family 

members engage in specified activities 

that disqualify them from serving on the 

public arbitrator roster. 

The Commission also recognizes some 

of the other concerns raised by 

commenters regarding the process 

FINRA used for proposing this rule. 

Some commenters expressed concern 

that FINRA did not perform a costbenefit analysis prior to proposing the 

rule change.193 Other commenters 

recommended that FINRA submit the 

proposal to its Arbitration Task Force 

prior to proposing it.194 In response, 

FINRA identified the process it took in 

developing and considering the 

proposal, including consultation with 

its NAMC, interested groups, and other 

forum users; stated that additional 

consideration by the Arbitration Task 

Force is not precluded; and stated its 

intent to perform future cost-benefit 

analysis to prevent burdening its 

arbitrators prior to the effectiveness of 

the proposed new rule.195 In sum, the 

Commission believes that FINRA gave 

due consideration to the proposal and 

met the requirements of the Exchange 

Act. However, the Commission will be 

interested in the results of FINRA’s 

future cost-benefit analysis and the staff 

will monitor the consequences of 

approval of the proposed rule change. 

For the reasons stated above, the 

Commission finds that the proposed 

rule change is consistent with the Act 

and the rules and regulations 

thereunder. 

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196 15 U.S.C. 78s(b)(2). 

197 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 73708 

(December 1, 2014), 79 FR 72225 (December 5, 

2014) (the ‘‘Proposing Release’’). 

4See Letters from Anonymous, dated December 

25, 2014; Leslie M. Norwood, Managing Director 

and Associate General Counsel, Securities Industry 

and Financial Markets Association (‘‘SIFMA’’), 

dated December 26, 2014 (‘‘SIFMA Letter’’); 

Anonymous Attorney, on behalf of a registered 

investment advisor and municipal advisor 

(‘‘Anonymous Attorney’’), dated December 26, 2014 

(‘‘Anonymous Letter’’); Tamara K. Salmon, Senior 

Associate Counsel, Investment Company Institute 

(‘‘ICI’’), dated December 29, 2014 (‘‘ICI Letter’’); and 

Terri Heaton, President, National Association of 

Municipal Advisors (‘‘NAMA’’), dated January 27, 

2015 (‘‘NAMA Letter No. 1’’). 

5See Letter to Secretary, Commission, from 

Lawrence P. Sandor, Deputy General Counsel, 

MSRB, dated February 5, 2015 (‘‘MSRB Response 

Letter No. 1’’). 

6See Letter to Secretary, Commission, from 

Lawrence P. Sandor, Deputy General Counsel, 

MSRB, dated February 5, 2015. Amendment No. 1 

partially amends the text of the proposed rule 

change to revise Rules G–1(a)(ii)(B), G–3(a)(i)(A)(2) 

and G–3(b)(i)(B) by deleting the following clause: 

‘‘Except to the extent a person must be qualified as 

a municipal advisor representative to perform such 

services.’’ The MSRB believes that it would be 

premature to include such clause until certain 

foundational rules regarding municipal advisors are 

approved and effective. 

7See Letters from Dave A. Sanchez Attorney at 

Law (‘‘Sanchez’’), dated February 12, 2015 

(‘‘Sanchez Letter’’); and Terri Heaton, President, 

NAMA, dated February 12, 2015 (‘‘NAMA Letter 

No. 2’’). 

8See Letter to Secretary, Commission, from 

Lawrence P. Sandor, Deputy General Counsel, 

MSRB, dated February 20, 2015 (‘‘MSRB Response 

Letter No. 2’’ and together with MSRB Response 

Letter No. 1, the ‘‘MSRB Response Letters’’). 

9See Letter to Secretary, Commission, from 

Michael Cowart, Assistant General Counsel, MSRB, 

dated February 25, 2015. Amendment No. 2 

partially amends Amendment No. 1 to correct a 

technical error in a quotation of rule text. 

10See supra note 3 at 2. 

11See Exhibit 5 of the Amendments. 

12 Id. 

13See supra note 3 at 9. 

14 Id. 

15 Id. 

16See supra note 11. 

17 Id. 

V. Conclusion 

It is therefore ordered pursuant to 

section 19(b)(2) of the Act 196 that the 

proposed rule change (SR–FINRA– 

2014–028) be and hereby is approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.197

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. 2015–04419 Filed 3–3–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74384; File No. SR–MSRB– 

2014–08] 

Self-Regulatory Organizations; 

Municipal Securities Rulemaking 

Board; Notice of Filing of Amendment 

No. 1 and Amendment No. 2 and Order 

Granting Accelerated Approval of a 

Proposed Rule Change Consisting of 

Proposed Amendments to MSRB Rules 

G–1, on Separately Identifiable 

Department or Division of a Bank; 

G–2, on Standards of Professional 

Qualification; G–3, on Professional 

Qualification Requirements; and D–13, 

on Municipal Advisory Activities 

February 26, 2015. 

I. Introduction 

On November 18, 2014, the Municipal 

Securities Rulemaking Board (the 

‘‘MSRB’’ or ‘‘Board’’) filed with the 

Securities and Exchange Commission 

(the ‘‘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 consisting of proposed 

amendments to MSRB Rules G–1, on 

separately identifiable department or 

division of a bank; G–2, on standards of 

professional qualification; G–3, on 

professional qualification requirements; 

and D–13, on municipal advisory 

activities (the ‘‘proposed rule change’’). 

The proposed rule change was 

published for comment in the Federal 

Register on December 5, 2014.3

The Commission received five 

comment letters on the proposed rule 

change.4 On February 5, 2015, the 

MSRB submitted a response to the 

comments on the proposed rule change 5

and filed Amendment No. 1 

(‘‘Amendment No. 1’’).6

The Commission received two 

comment letters on Amendment No. 1.7

On February 20, 2015, the MSRB 

submitted a response to the comments 

on Amendment No.1.8 On February 25, 

2015, the MSRB submitted Amendment 

No. 2 (‘‘Amendment No. 2’’ and together 

with Amendment No. 1, the 

‘‘Amendments’’).9 The Commission is 

publishing this notice to solicit 

comments on the Amendments from 

interested persons and is approving the 

proposed rule change, as modified by 

the Amendments, on an accelerated 

basis. 

II. Description of the Proposed Rule 

Change 

According to the MSRB, the purpose 

of the proposed rule change is to 

establish professional qualification 

requirements for municipal advisors 

and their associated persons and to 

make related changes to select MSRB 

rules.10 A full description of the 

proposed rule change is contained in 

the Proposing Release. 

1. Proposed Amendments to Rule G–1 

The proposed amendments to Rule G– 

1 includes language to provide that, for 

purposes of its municipal advisory 

activities, the term ‘‘separately 

identifiable department or division of a 

bank’’ would have the same meaning as 

used in 17 CFR 240.15Ba1–1(d)(4).11

2. Proposed Amendments to Rule G–2 

The proposed amendments to Rule G– 

2 add a basic requirement that no 

municipal advisor shall engage in 

municipal advisory activities unless 

such municipal advisor and every 

natural person associated with such 

municipal advisor is qualified in 

accordance with the rules of the 

Board.12

3. Proposed Amendments to Rule G–3 

Apprenticeship 

MSRB Rule G–3 currently requires a 

municipal securities representative to 

serve an apprenticeship period of 90 

days before transacting business with 

any member of the public or receiving 

compensation for such activities.13 The 

MSRB believes that dealers and 

municipal advisors should determine 

the length and nature of the initial 

training for newly registered persons, 

consistent with industry feedback and 

the approach taken by Financial 

Industry Regulatory Authority 

(‘‘FINRA’’).14 Accordingly, the proposed 

amendments to Rule G–3 eliminate the 

apprenticeship requirement for 

municipal securities representatives 

and, similarly, do not propose an 

apprenticeship requirement for 

municipal advisor representatives.15

New Registration Classifications 

The proposed amendments to Rule G– 

3 create two new registration 

classifications: (i) Municipal advisor 

representative; and (ii) municipal 

advisor principal.16

The proposed amendments to Rule G– 

3 define a ‘‘municipal advisor 

representative’’ as a natural person 

associated with a municipal advisor 

who engages in municipal advisory 

activities on the municipal advisor’s 

behalf, other than a person performing 

only clerical, administrative, support or 

similar functions.17 The proposed 

amendments to Rule G–3 require each 

municipal advisor representative to take 

and pass the Municipal Advisor 

mstockstill on DSK4VPTVN1PROD with NOTICES