Federal Register / Vol. 79, No. 199 / Wednesday, October 15, 2014 / Notices 61915 

12 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Rel. No. 62930 

(Sept. 17, 2010), 75 FR 58007 (Sept. 23, 2010) (SR– 

FINRA–2010–036). 

4See Securities Exchange Act Rel. No. 64954 (Jul. 

25, 2011), 76 FR 45631 (Jul. 29, 2011) (SR–FINRA– 

2010–036) (Notice of Filing Proposed Rule Change 

and Amendment No. 1 to Amend the Codes of 

Arbitration Procedure To Permit Arbitrators To 

Make Mid-Case Referrals) (hereinafter, the 

‘‘Amended Original Proposal,’’ to distinguish 

Amendment No.1 to the original proposal from the 

current proposal as amended by Partial Amendment 

No. 1.). 

5See SR–FINRA–2010–036, Withdrawal of 

Proposed Rule Change, available at http://

www.finra.org/Industry/Regulation/RuleFilings/

2010/P121722. 

6See Securities Exchange Act Rel. No. 71534 

(Feb. 12, 2014), 79 FR 9523 (Feb. 19, 2014) (SR– 

FINRA–2014–005) (‘‘Notice of Filing’’). 

7See Letter from Mignon McLemore, Assistant 

General Counsel, FINRA Dispute Resolution, to 

Lourdes Gonzalez, Commission, dated May 19, 

2014 (‘‘May Response’’). The May Response and the 

text of Partial Amendment No. 1 are available on 

Continued 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

FINRA–2014–040 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Brent J. Fields, Secretary, Securities 

and Exchange Commission, 100 F Street 

NE., Washington, DC 20549. 

All submissions should refer to File 

Number SR–FINRA–2014–040. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE., 

Washington, DC 20549, on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of such 

filing also will be available for 

inspection and copying at the principal 

office of FINRA. All comments received 

will be posted without change; the 

Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–FINRA– 

2013–040 and should be submitted on 

or before November 5, 2014. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.12

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–24454 Filed 10–14–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73319; File No. SR–FINRA– 

2014–005] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving a 

Proposed Rule Change, as Modified by 

Partial Amendment No. 1, To Broaden 

Arbitrators’ Authority To Make 

Referrals During an Arbitration 

Proceeding 

October 8, 2014. 

I. Introduction 

On July 12, 2010, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed a proposal pursuant to 

Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’) 1 and Rule 

19b-4 thereunder,2 with the Securities 

and Exchange Commission 

(‘‘Commission’’) to amend Rule 12104 

(Effect of Arbitration on FINRA 

Regulatory Activities) of the Code of 

Arbitration Procedure for Customer 

Disputes (‘‘Customer Code’’) and Rule 

13104 (Effect of Arbitration on FINRA 

Regulatory Activities) of the Code of 

Arbitration Procedure for Industry 

Disputes (‘‘Industry Code’’) 

(collectively, the ‘‘Codes’’). This initial 

proposal would have permitted 

arbitrators to make referrals to FINRA 

during an arbitration case, would have 

required the FINRA Director of 

Arbitration (‘‘Director’’) to disclose the 

referral to the parties, and would have 

required the entire panel to withdraw 

upon a party’s request that a referring 

arbitrator withdraw (‘‘original 

proposal’’). The Commission published 

the original proposal for comment on 

September 17, 2010.3 On July 7, 2011, 

FINRA responded to comments received 

by the Commission by filing an 

amendment to the original proposal,4

which replaced the original proposal in 

its entirety. 

Under the Amended Original 

Proposal, an arbitrator would have been 

permitted to make a mid-case referral if 

he or she became aware of any matter 

or conduct that the arbitrator had reason 

to believe posed a serious threat, 

whether ongoing or imminent, that was 

likely to harm investors unless 

immediate action was taken. A mid-case 

referral could not have been based 

solely on allegations in the pleadings. 

The Amended Original Proposal also 

would have instructed the arbitrator to 

wait until the arbitration concluded to 

make a referral if, in the arbitrator’s 

judgment, investor protection would not 

have been materially compromised by 

the delay. Further, if an arbitrator made 

a mid-case referral, the Director would 

have disclosed the act of making the 

referral to the parties, and a party would 

have been permitted to request recusal 

of the referring arbitrator. The Amended 

Original Proposal would have required 

either the President of FINRA Dispute 

Resolution (‘‘President’’) or the Director 

to evaluate the referral and determine 

whether to forward it to other divisions 

of FINRA for further review. Finally, the 

Amended Original Proposal would have 

retained the provisions in Rule 12104(b) 

of the Customer Code and Rule 13104(b) 

of the Industry Code that permits an 

arbitrator to make a post-case referral. 

The Commission received five comment 

letters in response to the Amended 

Original Proposal. 

On January 29, 2014, FINRA 

withdrew the Amended Original 

Proposal 5 without responding to the 

comments and filed the current 

proposal (‘‘Proposed Rule’’). The 

Proposed Rule was identical to the 

Amended Original Proposal. As part of 

the Proposed Rule, FINRA responded to 

comments received on the Amended 

Original Proposal. The Proposed Rule 

was published for comment in the 

Federal Register on February 12, 2014.6

The Commission received 10 comment 

letters in response. On March 28, 2014, 

FINRA extended to May 20, 2014, the 

time period in which the Commission 

must approve the Proposed Rule, 

disapprove the Proposed Rule, or 

institute proceedings to determine 

whether to approve or disapprove the 

Proposed Rule. On May 19, 2014, 

FINRA responded to comments to the 

Proposed Rule and filed Partial 

Amendment No. 1.7


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FINRA’s Web site at http://www.finra.org, at the 

principal office of FINRA, and at the Commission’s 

Public Reference Room. The May Response is also 

available on the Commission’s Web site at http:// 

www.sec.gov. 

8 15 U.S.C. 78s(b)(2)(B). 

9See Securities Exchange Act Rel. No. 72196 

(May 20, 2014), 76 FR 30206 (May 27, 2014) 

(‘‘Order Instituting Proceedings’’). 

10 Jenice L. Malecki, Esquire, Malecki Law (May 

20, 2014, commenting only on the Proposed Rule) 

(‘‘Malecki’’); George H. Friedman, Esquire, George 

H. Friedman Consulting, LLC (Jun. 9, 2014) 

(‘‘Friedman’’); Nicole G. Iannarone, Assistant 

Clinical Professor, and Patricia Uceda, Student 

Intern, Investor Advocacy Clinic, Georgia State 

University College of Law (Jun. 20, 2014) (‘‘Georgia 

State’’); Guillermo Gleizer, Esq. (Jun. 25, 2014) 

(‘‘Gleizer’’); Jason Doss, President, Public Investors 

Arbitration Bar Association (Jun. 26, 2014) 

(‘‘PIABA’’); Ellen Liang, Student Intern, Elissa 

Germaine, Supervising Attorney, and Jill Gross, 

Director, Pace Investor Rights Clinic (Jun. 26, 2014) 

(‘‘Pace’’); Richard P. Ryder, Esquire, President, 

Securities Arbitration Commentator, Inc. (Jun. 26, 

2014) (‘‘Ryder’’); Andrea Seidt, President, North 

American Securities Administrators Association 

and Ohio Securities Commissioner, (Jun. 27, 2014) 

(‘‘NASAA’’); and Steven B. Caruso, Esq., Maddox 

Hargett & Caruso, P.C. (July 2, 2014) (‘‘Caruso’’). 

11Letter from Mignon McLemore, Assistant Chief 

Counsel, FINRA Dispute Resolution, Inc., to Kevin 

O’Neill, Deputy Secretary, Commission, dated 

August 14, 2014 (‘‘FINRA Letter’’). 

12See note 10, supra. 

13PIABA, Georgia State, Gleizer, Ryder, and 

Caruso. 

14Pace, NASAA, and Malecki. 

15Friedman. 

16Friedman. 

17Pace and NASAA. See also Malecki (supporting 

the goal of the Proposed Rule). 

18Pace and NASAA. These suggestions are 

discussed further below. 

19FINRA Letter at 4. 

20See Order Instituting Proceedings, note 9, 

supra. 

21See, e.g., PIABA, Ryder, and Pace. 

22PIABA and Malecki. 

23 Id. 

24FINRA Letter at 5, incorporating by reference 

May Response at 12. 

On May 20, 2014, the Commission 

published for comment both Partial 

Amendment No. 1, and an order 

instituting proceedings pursuant to 

Section 19(b)(2)(B) of the Act 8 to 

determine whether to approve or 

disapprove the Proposed Rule, as 

modified by Partial Amendment No. 1.9

The Commission received nine 

comments on the Proposed Rule as 

modified by Partial Amendment No. 1 

(together, the ‘‘Amended Current 

Proposal’’).10 On August 14, 2014, 

FINRA responded to these comments.11

This order approves the Amended 

Current Proposal. 

II. Description of the Amended Current 

Proposal 

As further described in the Notice of 

Filing, FINRA is proposing to amend 

Rule 12104 of the Customer Code and 

Rule 13104 of the Industry Code to 

broaden arbitrators’ authority to make 

referrals during an arbitration 

proceeding. Under the Amended 

Current Proposal, an arbitrator would be 

permitted to make a mid-case referral if 

the arbitrator becomes aware of any 

matter or conduct that the arbitrator has 

reason to believe poses a serious threat, 

whether ongoing or imminent, that is 

likely to harm investors unless 

immediate action is taken. A mid-case 

referral could not be based solely on 

allegations in the pleadings. The 

Amended Current Proposal would 

further provide that when a case is 

nearing completion, the arbitrator 

should wait until the case concludes to 

make a referral if, in the arbitrator’s 

judgment, investor protection would not 

be materially compromised by the 

delay. If an arbitrator makes a mid-case 

referral, the Director would disclose the 

act of making the referral to the parties, 

and a party would be permitted to 

request recusal of the referring 

arbitrator. The Amended Current 

Proposal would require either the 

President or the Director to evaluate the 

referral and determine whether to 

forward it to other divisions of FINRA 

for further review. The Amended 

Current Proposal would retain the 

provisions in Rule 12104(b) of the 

Customer Code and Rule 13104(b) of the 

Industry Code that permit an arbitrator 

to make a post-case referral. Partial 

Amendment No. 1 would require that a 

party requesting recusal of an arbitrator 

following a mid-case referral, and based 

on such a referral, do so within three 

days of being notified of the mid-case 

referral. FINRA stated that the 

amendment is intended to prevent a 

party from receiving notice of the midcase referral and reserving the right to 

strategically request recusal when it 

would best benefit that party. 

III. Comments on the Amended Current 

Proposal 

The Commission received nine 

comments on the Amended Current 

Proposal.12 Five commenters opposed 

the Amended Current Proposal,13 three 

commenters partially supported the 

Amended Current Proposal,14 and one 

commenter supported the Amended 

Current Proposal.15

A. Support for the Goals of the 

Amended Current Proposal 

One commenter states that the 

Amended Current Proposal, along with 

certain suggested changes, would 

enhance the investor protection mission 

of FINRA and the SEC.16 Two other 

commenters support FINRA’s efforts to 

identify and stop ongoing securities 

market schemes that could harm 

investors by authorizing arbitrators to 

make mid-case referrals.17 They express 

concerns, however, about the potential 

impacts of the Amended Current 

Proposal on individual claimants and 

suggest further changes that, in their 

view, would minimize the negative 

impact of the Amended Current 

Proposal.18

FINRA replies that it has carefully 

considered the impact that its proposal 

could have on an individual investor 

claimant. However, it states further that 

its regulatory obligations also require it 

to weigh the potential effect that failing 

to allow mid-case referrals could have 

on a large group of investors. In 

considering these potential effects, 

FINRA determined that the proposal 

would help FINRA detect serious 

threats to investors at an earlier stage 

than would otherwise occur; this early 

warning, FINRA states, could help curb 

financial losses of a potentially large 

group of investors. Therefore, FINRA 

states that providing additional 

protection to public investors generally 

by strengthening its regulatory structure 

outweighs the potential increased costs 

to an investor party.19

B. Effect on Retail Investors 

The Commission solicited comment 

on the Amended Current Proposal’s 

effects on retail investors.20 In response, 

some commenters express concern 

about increased costs and delays 

incurred by the investor in the 

arbitration if an arbitrator made a midcase referral.21 Two commenters also 

contend that a retail investor should not 

be expected to incur the costs that could 

arise if an arbitrator made a mid-case 

referral.22 These commenters suggest 

that the costs that result from a mid-case 

referral should be borne by the party 

seeking recusal or by FINRA.23

Regarding the suggestion that FINRA 

pay an investor’s costs and expenses 

that could arise as a result of a mid-case 

referral, FINRA states it does not believe 

that it would be appropriate for the 

forum that administers the arbitration 

process to bear the costs for any party. 

FINRA states also that it provides an 

arbitration forum that is neutral and fair 

for all parties to a dispute, and that if 

the forum were to agree to pay for one 

party’s costs and expenses it would 

raise questions about the forum’s 

neutrality and its role in administering 

the arbitration process; FINRA therefore 

declines to make such a change.24

While FINRA acknowledges that it 

cannot eliminate all of the potential 

costs or delays to an individual claimant 


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25FINRA Letter at 4, incorporating by reference 

May Response at 12–13. 26FINRA Letter at 5, citing Rule 12902(c) and 

Rule 13902(c). 27FINRA Letter at 5, incorporating by reference 

May Response at 11–12. 28FINRA Letter at 5, incorporating by reference 

May Response at 12. 

29 Id. 

30FINRA Letter at 5, incorporating by reference 

May Response at 13. 

31FINRA Letter at 5, incorporating by reference 

May Response at 14. 

32FINRA Letter at 5, incorporating by reference 

May Response at 12–13. 

33FINRA Letter at 5, incorporating by reference 

May Response at 14. 

34FINRA Letter at 5. 

35Caruso, Ryder, and Pace. 

36FINRA Letter at 4. 

37 Id. 

38FINRA Letter at 4–5. 

39PIABA. 

40Caruso. 

41Ryder. 

42FINRA Letter at 8, incorporating by reference 

May Response at 8–9. 

43FINRA Letter at 6. 

44Pace. 

45FINRA Letter at 6. 

46Friedman. 

47 Id. 

48FINRA Letter at 6, incorporating by reference 

May Response at 5. 

49FINRA Letter at 6. 

associated with a mid-case referral, it 

also describes a number of ways in 

which the Codes permit a hearing panel 

to allocate costs in a manner that takes 

into account the circumstances leading 

to the costs’ incursion, ways in which 

the Codes permit FINRA to absorb some 

costs that may be incurred as a result of 

a mid-case referral, as well as ways in 

which the parties themselves can 

minimize costs and delays.25

For example, FINRA notes that the 

Codes permit a panel to allocate the 

amount of certain costs and expenses 

incurred by the parties, and which party 

or parties will pay those costs and 

expenses.26 Citing an example, FINRA 

states that if an investor party incurs 

costs and expenses as a result of a midcase referral, the investor can request 

that the arbitrator or panel assign 

liability for the investor’s costs and 

expenses to the respondent.27 Similarly, 

FINRA notes that the Codes give 

arbitrators the ability to allocate 

postponement fees against the party that 

contributed to the need for the 

postponement.28 FINRA notes further 

that, under Rule 12601(b)(1) of the 

Customer Code and Rule 13601(b)(1) of 

the Industry Code, if a party requests a 

postponement as a result of an 

arbitrator’s recusal based on a mid-case 

referral request, the panel could also 

assess part or all of any postponement 

fees against a party that did not request 

the postponement, if the panel 

determines that the non-requesting 

party caused or contributed to the need 

for the postponement.29

As to existing Code provisions that 

allow FINRA to help absorb some costs 

associated with any need for the 

replacement of an arbitrator, FINRA 

notes that it pays the replacement 

arbitrator to review the hearing record 

(e.g., listen to the digital recording or 

review a transcript, when available, of 

the prior hearing sessions) and learn 

about the arbitration case up to the 

point at which it was stopped.30

Pursuant to forum policy, FINRA notes 

the parties would not be assessed any 

fees for this review time.31

FINRA also highlights the options 

parties have to control the costs they 

could incur if an arbitrator makes a midcase referral.32 For example, FINRA 

states that the parties may agree to 

rehearing only key witnesses, or 

stipulate to summaries of prior 

testimony.33 In light of these factors, 

FINRA believes its current policies and 

procedures address the commenters’ 

concerns and declines to make any 

changes to the Amended Current 

Proposal.34

Other commenters raise concerns 

about the adverse effects a recusal 

request would have on an investor’s 

arbitration case, as well as the resulting 

motion to vacate that the commenters 

believe a respondent would file, if the 

referring arbitrator denies a recusal 

request.35 In response, FINRA notes 

that, while a denial of a recusal request 

could result in a motion to vacate, 

courts have found that such actions do 

not provide parties with valid bias 

grounds on which to challenge an 

award.36 Further, FINRA notes that it 

expects to issue a Regulatory Notice if 

the Amended Current Proposal is 

approved that would, among other 

things, emphasize that arbitrators are 

not required to grant a recusal request 

based on making a mid-case referral, 

and also provide guidance on the courts’ 

findings on what constitutes grounds for 

evident partiality.37 This guidance, 

FINRA believes, could further mitigate 

the effect of these motions on a retail 

investor claimant. Consequently, FINRA 

believes that its current policies and 

procedures, as well as case law, address 

these concerns.38

C. Standard of Referral 

The Commission solicited comment 

on the proposed standard of referral, 

and whether FINRA should propose a 

different standard. In response, one 

commenter states that a different 

standard of referral under proposed 

Rule 12104(b) would not insulate a 

claimant from the adverse impacts of 

the proposal.39 Another commenter 

states that the proposed standard may 

be inadequate for those arbitrators who 

are not attorneys and not trained in the 

nuances of the legal system.40 A third 

commenter states that the standard is 

designed to assure that the rule is rarely 

invoked, but does not believe it would 

prevent arbitrators from making an 

unnecessary and wrongly-based 

referral.41 In response, FINRA states that 

the reasonable belief standard is 

appropriate for arbitrators because it 

would allow arbitrators to use their 

judgment, based on their assessment of 

the facts, evidence, and testimony, 

when making decisions during an 

arbitration.42 Further, FINRA agrees to 

provide training for arbitrators on the 

mid-case referral rule and how it should 

be applied.43

One commenter, who supports the 

standard for referral as well as FINRA’s 

proposed training, states that the 

standard, along with the training, 

should help prevent arbitrators from 

making unnecessary mid-case referrals, 

and facilitate a smoother transition for 

them to learn how to apply the rule.44

FINRA agrees, and, believes the 

proposed standard is appropriate and 

should remain unchanged.45

One commenter suggests that FINRA 

eliminate the proposed provision of the 

rule that directs an arbitrator to delay a 

referral if a case is nearing completion 

until the case concludes if, in the 

arbitrator’s judgment, investor 

protection will not be materially 

compromised by this delay. 46 This 

commenter believes the phrase ‘‘nearing 

completion’’ in the proposed rule text is 

vague and would invite inconsistent 

interpretation.47 In response, FINRA 

states that this option to delay a referral 

permits arbitrators to protect a party 

from the effects that a mid-case referral 

could have on a person’s case, if the 

facts and circumstances support waiting 

until the case concludes, and that such 

a result could provide protections to 

investors in the arbitration process.48

FINRA also states that this provision 

provides additional guidance to 

arbitrators as to when it is appropriate 

to make a mid-case referral.49 Thus, 

FINRA declines to make the 

commenters’ suggested changes. 

D. Whether Partial Amendment No. 1 

Ameliorates Potential Adverse Effects 

on Claimants 

Partial Amendment No. 1 requires 

that a party file a recusal request for the 

referring arbitrator no later than three 

days after the Director notifies the 

parties of the referral, or forfeit the right 


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50PIABA, Pace, and Georgia State. 51PIABA. 52 Id. 53Pace. 54 Id. 55 Georgia State. 56NASAA. 57FINRA Letter at 7 (citing 9 U.S.C. 10(a)). 

58FINRA Letter at 7. 

59 Id. 

60FINRA Letter at 4. 

61FINRA Letter at 8. 

62Pace, Ryder, and Friedman. 

63 Georgia State, NASAA, and Caruso. 

64Pace. 

65FINRA Letter at 8, incorporating by reference 

May Letter at 9–10. 

66 Id. 

67FINRA Letter at 8. 

68 Id. 

69Caruso. 

70 Id. 

71FINRA Letter at 8–9. 

72 Id. 

73 Id. 

74 Id. 

75Friedman and NASAA. 

76Friedman. 

77NASAA. 

78FINRA Letter at 9. 

79 Id. 

80 Id. 

to request recusal based on the mid-case 

referral. The Commission solicited 

comment on this amendment, and in 

particular whether the amendment 

ameliorates commenters’ concerns that 

notifying parties of a mid-case referral 

could lead to adverse consequences to 

the claimant, including requests for 

recusal and challenges to an award. In 

response, three commenters state they 

do not believe Partial Amendment No. 

1 will ameliorate the rule’s potential 

adverse effects on claimants.50

One commenter contends that Partial 

Amendment No. 1 would not minimize 

the negative consequences of the 

Amended Current Proposal.51 The 

commenter states that if the respondent 

inadvertently or purposefully fails to 

file a recusal request within three days 

of being notified about the referral, this 

failure would serve as basis for a 

subsequent motion to vacate an 

award.52 One commenter indicates that 

Partial Amendment No. 1 does not 

ameliorate its concerns because the 

proposal contains an explicit reference 

to recusal.53 This commenter argues that 

a mid-case referral should not provide 

any grounds for recusal or for a motion 

to vacate an award.54 Another 

commenter believes that Partial 

Amendment No. 1 does not ameliorate 

its concerns about the effect that 

notifying the parties would have on the 

claimant’s case, namely that a mid-case 

referral would result in a recusal request 

and a motion to vacate if the subject of 

the mid-case referral loses the request or 

case.55 Finally, one commenter suggests 

that FINRA expressly state in the rule 

that mid-case referral is not grounds for 

recusal.56

In response, FINRA states that a 

party’s inadvertent or deliberate failure 

to comply with a forum’s rules, such as 

by not filing a recusal request within 

three days, is not grounds, under the 

Federal Arbitration Act, for vacating an 

arbitration award.57

As to commenters’ suggestion that the 

Amended Current Proposal either 

creates a right to request recusal, 

encourages recusal motions, or that the 

rule should mandate the outcome of 

such motions, FINRA notes that a party 

currently may make such a request 

under the Codes in any arbitration case; 

the Amended Current Proposal does not 

create such a right.58 FINRA also 

explains that its rules do not dictate the 

grounds for granting recusal requests 

and do not require specific decisions by 

arbitrators in response to such 

requests.59 In response to the 

commenter’s concern about the subject 

of a mid-case referral filing a motion to 

vacate if the request is denied or case is 

lost, FINRA acknowledges that such 

motions may occur, but notes that 

courts have found that an arbitrator’s 

denying a recusal request does not 

provide parties with valid bias grounds 

on which to challenge an award.60

FINRA believes that its current policies, 

procedures, and case law address the 

commenters’ concerns and declines to 

amend the Amended Current 

Proposal.61

E. Eliminating the Notice Requirement 

The Commission solicited comment 

regarding whether the requirement to 

notify parties of a mid-case referral 

should be eliminated. Commenters were 

divided, with three commenters 

opposing elimination,62 and three other 

commenters supporting it.63 One 

commenter believes that notification is 

consistent with the current obligations 

of arbitrators to provide full disclosure 

to help ensure fairness in the arbitration 

process.64 FINRA, in response, points to 

the forum’s policies encouraging a wide 

variety of arbitrator disclosures and its 

rules that require arbitrators to make 

disclosures when appointed to a FINRA 

arbitration, at any stage of the 

arbitration, or as circumstances 

dictate.65 Further, FINRA also notes 

that, in addition to its rules and 

practices, case law has established a 

broad requirement that arbitrators make 

full disclosures,66 and, that a failure to 

do so could provide a party with 

grounds to challenge an award by 

claiming evident partiality against the 

arbitrator.67 For the reasons, FINRA 

declines to eliminate the notice 

requirement.68

One commenter suggests that 

providing the subject of a mid-case 

referral advance notice of a potential 

investigation could negatively impact 

subsequent criminal or regulatory 

investigations.69 In particular, the 

commenter believes that such notice 

could lead to destruction of evidence 

and obstruction of the investigation.70

FINRA states in response that 

knowledge of behavior that would 

warrant a mid-case referral, if revealed 

during a hearing, would likely not be a 

revelation to the alleged wrongdoer. 

However, the airing of such information 

during a hearing would serve as notice 

to the wrongdoer that the matter or 

conduct is on the verge of public 

exposure.71 FINRA states that, after that, 

the wrongdoer could begin to engage in 

the behavior described by the 

commenter, regardless of whether a 

mid-case referral is made.72 FINRA 

believes that, in these instances, 

disclosure of a mid-case referral would 

give regulators advance notice of a 

serious threat that is likely to harm 

investors, and, thus, permit them to take 

immediate action instead of waiting 

until the end of the case.73 FINRA states 

further that if FINRA did not learn of 

the referral until after the case closes, 

there is a risk that the wrongdoer would 

have extra time to destroy evidence.74

F. Forwarding the Mid-Case Referral to 

the President or Director 

Two commenters suggest removing 

the provision that would require 

forwarding the mid-case referral to the 

President or Director for review.75 One 

commenter believes the referral could 

be forwarded directly to the regulatory 

or enforcement department of FINRA.76

The other commenter suggests 

expanding the direct referral concept to 

include the SEC, state securities 

regulators, or local or federal law 

enforcement.77 FINRA states that it 

modeled this provision after the current 

practice used when an arbitrator makes 

a post-case referral.78 FINRA also states 

that the purpose of the review is to 

determine which FINRA division 

should receive the referral, and whether 

other divisions or regulators should be 

notified.79 FINRA believes that this 

provision would result in an efficient 

use of its resources, and, thus, declines 

to make the suggested change.80


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81Pace and Malecki. 

82Pace. 

83Malecki. 

84FINRA Letter at 10. 

85 Id. 

86 Id. 

87 Id. 

88 Id. 

89FINRA Letter at 10. 

90 Georgia State, PIABA, and Malecki. 

91 Georgia State, PIABA, and Malecki. 

92FINRA Letter at 10. 

93FINRA Letter at 10–11. 

94FINRA Letter at 11. 

95FINRA Letter at 11, citing May Response at 7– 

8. 

96FINRA Letter at 11. 

97 Georgia State, Malecki, and Caruso. 

98FINRA Letter at 11. 

99 Id. 

100Ryder, Gleizer, and Malecki. 

101 Id. 

102FINRA Letter at 11–12. 

103FINRA Letter at 12. 

104 Id. 

105NASAA and Pace. 

106FINRA Letter at 12. 

107 Id. 

G. Other Issues Related to the Amended 

Current Proposal Than Those 

Specifically Raised by the Commission 

1. Explicit References to Recusal 

Two commenters contend that the 

explicit reference to recusal in the 

Amended Current Proposal suggests 

implicitly that an arbitrator could be 

biased after the person has heard 

enough evidence of wrongdoing.81 One 

commenter states that finding liability 

based on evidence presented does not 

mean that the arbitrator is sufficiently 

biased against the wrongdoer to justify 

good cause for recusal.82 Another 

commenter compares the proposal to 

the Federal laws, such as the 

Bankruptcy Code, which, according to 

the commenter, are less stringent and do 

not expressly provide for recusal.83 This 

commenter contends that by explaining 

the availability of a recusal request in 

the Amended Current Proposal, even 

though it is available in other parts of 

the Codes, FINRA is seeking to make its 

rules more stringent than the Federal 

laws. 

In response, FINRA first notes that the 

Amended Current Proposal does not 

create a right to make a recusal request, 

which already exists in any arbitration 

case.84 Second, FINRA disagrees that 

the explicit reference to recusal implies 

potential bias on the part of an 

arbitrator.85 Last, FINRA notes that the 

Federal laws, to which one commenter 

refers, relate to grounds for recusal. The 

reference in this rule is not about the 

grounds for recusal.86 FINRA states that 

arbitrators are expected to make 

decisions based on evidence presented 

during a hearing, and such decisions 

alone have been insufficient to support 

a showing of evident partiality.87

FINRA states also that the act of 

making a mid-case referral is not 

evidence of bias, whether implied or 

overt.88 The forum’s rules, according to 

FINRA, are designed to guide parties 

and staff in the administration of 

arbitration cases. FINRA believes its 

rules are more effective when 

procedures are expressly incorporated 

in the arbitration rules, and that this 

transparency results in the efficient 

administration of cases and consistent 

application of the rules.89

2. Rely on Current Referral Process 

Three commenters suggest that FINRA 

rely on the current process for referring 

actions or matters for further 

investigation.90 These commenters 

believe FINRA should use this process 

to detect wrongdoing rather than rely on 

the arbitrators to enforce the rules and, 

thus, create issues of bias and 

impartiality.91 FINRA, in response, 

notes that when an arbitration claim is 

filed, FINRA’s Central Review Group 

(‘‘CRG’’) receives a copy of statements of 

claims and pleadings and reviews them 

to determine if referral to FINRA 

Enforcement is warranted.92 FINRA 

states also that the enforcement 

procedures conducted by CRG prior to 

an arbitration hearing would not be an 

effective substitute for arbitrator action 

taken during a hearing based on 

evidence presented.93 FINRA notes 

further that analysis by FINRA 

Enforcement employees conducted on 

the claims and pleadings permit FINRA 

to monitor and analyze volumes of data 

through various market data systems to 

detect evidence of wrongdoing.94

FINRA states, however, that expanding 

these Enforcement procedures would 

not necessarily provide the same 

benefits as having earlier notification by 

arbitrators, who may learn of a serious 

threat during the course of a hearing.95

For these reasons FINRA declines to 

expand its enforcement procedures as 

an alternative to the Amended Current 

Proposal.96

3. No Evidence To Support the Need for 

the Amended Current Proposal 

Three commenters contend that 

FINRA did not provide evidence to 

support the need for the Amended 

Current Proposal or FINRA’s assertion 

that it would prevent ongoing fraud or 

losses for investors.97 FINRA responds 

that its assessment of its regulatory 

structure, as well as its determination 

that its rules would be strengthened by 

closing a gap that currently permits 

arbitrators to make post-case referrals 

only, justify the need for the Amended 

Current Proposal.98 FINRA believes that 

its assessment of the issue addresses 

this concern.99

4. Amended Current Proposal May 

Compromise an Arbitrator’s Role 

Three commenters express concern 

that the Amended Current Proposal 

would deputize arbitrators as 

examiners, who would be required to 

evaluate and report rule violations.100

They believe this role would conflict 

with an arbitrator’s duty, which is to 

serve as an arbiter of a dispute to 

achieve the best resolution in a manner 

that serves the interests of the parties.101

FINRA responds that its rules require 

arbitrators to be impartial and free from 

conflicts that could hinder their ability 

to decide a case fairly.102 FINRA cites 

case law in support of its position that 

arbitrators would not compromise their 

neutrality by making a mid-case referral, 

because, in doing so, arbitrators would 

be performing one of the duties that is 

expected of arbitrators.103 FINRA 

believes that its current rules, case law, 

and the Code of Ethics for Arbitrators in 

Commercial Disputes address these 

concerns.104

5. Monitor Effectiveness and Provide 

Statistics to the Commission 

Two commenters recommend that 

FINRA monitor the effects of the 

Amended Current Proposal on 

individual investors and disclose 

statistics periodically to the 

Commission on the number of mid-case 

referrals that arbitrators make.105 FINRA 

notes that it has implemented 

procedures to track post-case referrals 

and says that it will update its 

procedures to track the number of midcase referrals made under the Amended 

Current Proposal and would provide 

this data to the Commission a year after 

the effective date of the proposed rules, 

and thereafter at the Commission’s 

request.106 FINRA would also monitor 

the effects of the Amended Current 

Proposal to determine whether further 

action would be necessary.107

IV. Discussion 

After carefully considering the 

Amended Current Proposal, the 

comments submitted, and FINRA’s 

response to the comments, the 

Commission finds that the Amended 

Current Proposal is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 


tkelley on DSK3SPTVN1PROD with NOTICES
61920 Federal Register / Vol. 79, No. 199 / Wednesday, October 15, 2014 / Notices 

108 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). 

109 15 U.S.C. 78o–3(b)(6). 

110 15 U.S.C. 78s(b)(2). 

111 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

a national securities association.108 In 

particular, the Commission finds that 

the Amended Current Proposal is 

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

Act,109 which requires, among other 

things, that FINRA 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. 

The rule will permit arbitrators to 

refer to FINRA any matter or conduct 

that an arbitrator has reason to believe 

poses a serious threat, whether ongoing 

or imminent, that is likely to harm 

investors unless immediate action is 

taken. The Commission believes that 

allowing arbitrators to voice a serious 

concern under extremely limited 

circumstances provides a necessary 

means of alerting FINRA senior staff 

should an arbitrator have reason to 

believe during the pendency of an 

arbitration that there is a threat of 

serious ongoing or imminent harm. This 

notification would provide FINRA with 

earlier warning of potentially harmful 

conduct than might otherwise occur, 

and allow FINRA to better protect 

investors by intervening more quickly 

under the appropriate circumstances. 

As FINRA acknowledges, the rule 

may cause delays and increase costs for 

a claimant in some instances. However, 

the rule is designed in a way that should 

make its invocation rare, limiting such 

negative effects. First, the standard for 

reporting is high. Because the rule limits 

mid-case referrals to situations where 

the arbitrator has reason to believe that 

a matter or conduct poses a serious 

threat likely to harm investors unless 

immediate action is taken, it should be 

rarely invoked. Second, permitting midcase referrals only for matters or 

conduct unearthed during the 

proceedings—and not on the basis of 

allegations in the pleadings—means that 

an arbitrator will need to make a midcase referral decision only in cases 

when FINRA might not otherwise know 

about the potentially harmful conduct. 

Third, the proposal allows an arbitrator 

to delay making a mid-case referral 

when, in the arbitrator’s judgment, 

investor protection would not be 

materially compromised, further 

reducing the number of times the rule 

is invoked. Fourth, as amended, the rule 

limits recusal requests based on the 

referral itself to three days after the 

parties are notified of the recusal, 

limiting the opportunity for recusal 

requests and the potential strategic 

delay of a recusal request. 

Even in those rare instances where the 

rule is invoked and there is potential 

harm to an investor whose case involves 

a referral, such as a delay or additional 

costs, FINRA has identified ways that 

such harm can be limited. First, 

allocation of costs by an arbitrator or 

panel can take into account relative 

fault of the parties. Second, FINRA will 

bear certain costs itself, such as paying 

a replacement arbitrator to review the 

hearing record and to learn about the 

arbitration up to the point where the 

case was interrupted. Third, FINRA has 

identified ways in which the parties 

themselves can help minimize costs and 

delays, such as by agreeing to rehear 

only key witnesses, or stipulating to 

summaries of prior testimony. 

While this would not eliminate every 

potential cost or dilatory burden on an 

investor whose case may be adversely 

affected by a referral, we believe FINRA 

has identified ways those harms to 

parties in arbitration can be mitigated or 

minimized while better protecting 

investors and the public interest. 

Moreover, notifying parties of the fact 

of a referral can help to safeguard the 

fairness of the arbitration forum by 

keeping the parties equally informed, 

consistent with current arbitration 

practices. Also, having the Director or 

President serve as an intake point for 

any referrals would result in an efficient 

review and assignment process, and 

could help direct appropriate resources 

toward potentially harmful conduct as 

quickly as possible. In addition, by 

requiring requests for recusal to be made 

within three days of being notified, the 

rule will limit the uncertainty 

associated with whether a mid-case 

referral will result in an eventual 

recusal request. The Commission notes 

also that a recusal request can still be 

made for any reason at any time for 

reasons other than the referral request 

itself. 

In light of the potential gravity of the 

misconduct that may be reported, and 

because we believe the potential 

negative effects will be relatively 

limited and partially mitigated by the 

operation of other FINRA rules, we 

believe the Amended Current Proposal 

is consistent with the Act in that it is 

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. 

We appreciate the concerns of some 

commenters that mid-case referrals may 

disrupt or delay some arbitration 

proceedings. Therefore, as some 

commenters have suggested, and FINRA 

has agreed, FINRA will gather statistics 

and report to the Commission, for the 

period of one year from the effective 

date of this rule change and for later 

periods upon request, on the number of 

cases in which an arbitrator made a 

mid-case referral. FINRA will also 

monitor the effects of the Amended 

Current Proposal to determine whether 

further action is necessary. 

V. Conclusion 

It is therefore ordered pursuant to 

Section 19(b)(2) of the Act 110 that the 

proposed rule change (SR–FINRA– 

2014–0005), as modified by Partial 

Amendment No. 1, be and hereby is 

approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.111

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–24420 Filed 10–14–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73318; File No. SR–ISE– 

2014–49] 

Self-Regulatory Organizations; 

International Securities Exchange, 

LLC; Notice of Filing and Immediate 

Effectiveness of a Proposed Rule 

Change To Amend Rule 723 to Add a 

New PIM ISO Order Type 

October 8, 2014. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on October 

3, 2014 the International Securities 

Exchange, LLC (‘‘Exchange’’ or ‘‘ISE’’) 

filed with the Securities and Exchange 

Commission the proposed rule change, 

as described in Items I and II below, 

which items have been prepared by the 

self-regulatory organization. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The ISE proposes to amend its rules 

to add a new PIM ISO order type. The 

text of the proposed rule change is 

available on the Exchange’s Web site 

(http://www.ise.com), at the principal 


tkelley on DSK3SPTVN1PROD with NOTICES