Document ID: SEC-2007-1369-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2007-10-03T04:00Z

[Federal Register: October 3, 2007 (Volume 72, Number 191)]
[Notices]               
[Page 56410-56412]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03oc07-110]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56540; File No. SR-NASD-2006-109]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc. (n/k/a Financial Industry Regulatory Authority, Inc.); 
Order Approving Proposed Rule Change as Modified by Amendment Nos. 1 
and 2 Thereto Relating to Representation of Parties in Arbitration and 
Mediation

September 26, 2007.

I. Introduction

    On September 14, 2006, the National Association of Securities 
Dealers, Inc. (``NASD'') (n/k/a Financial Industry Regulatory 
Authority, Inc. (``FINRA'')), through its wholly owned subsidiary, NASD 
Dispute Resolution, Inc. (``NASD Dispute Resolution'') (n/k/a, FINRA 
Dispute Resolution, Inc.), 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 relating to representation of 
parties in arbitration and mediation.\3\ On November 9, 2006 and 
February 23, 2007, NASD Dispute Resolution submitted Amendment Nos. 1 
and 2, respectively, to the proposed rule change. The proposed rule 
change, as amended, was published for comment in the Federal Register 
on April 13, 2007.\4\ The Commission received five comments on the 
proposal.\5\ For the reasons discussed below, the Commission is 
approving the proposed rule change, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On July 26, 2007, the Commission approved a proposed rule 
change filed by NASD to amend NASD's Certificate of Incorporation to 
reflect its name change to Financial Industry Regulatory Authority 
Inc., or FINRA, in connection with the consolidation of the member 
firm regulatory functions of NASD and NYSE Regulation, Inc. See 
Exchange Act Release No. 56146 (July 26, 2007); 72 FR 42190 (Aug. 1, 
2007).
    \4\ See Securities Exchange Act Release No. 55604 (April 9, 
2007), 72 FR 18703 (April 13, 2007).
    \5\ See letters to Nancy Morris, Secretary, Commission, from 
Timothy Canning, Law Offices of Timothy A. Canning, dated May 4, 
2007 (``Canning''); Vincent DiCarlo, Law Offices of Vincent DiCarlo, 
dated May 4, 2007 (``DiCarlo''); Jill I. Gross, Director of 
Advocacy, Pace Investor Rights Project, dated May 4, 2007 
(``Pace''); Richard L. Sacks, dated May 3, 2007 (``Sacks''); and 
Irwin G. Stein, dated May 4, 2007 (``Stein'').
---------------------------------------------------------------------------

II. Description of the Proposal

    The changes to NASD's Code of Arbitration Procedure for Customer 
Disputes, Code of Arbitration Procedure for Industry Disputes, and Code 
of Mediation Procedure provide that in both arbitration and mediation: 
(1) Parties may represent themselves; (2) parties may be represented by 
an attorney, provided certain criteria are met; (3) parties may be 
represented by a person who is not an attorney, unless state law 
prohibits such representation or the person is currently suspended or 
barred from the securities industry in any capacity or is currently 
suspended from the practice of law or disbarred; and (4) issues 
regarding qualifications of a representative are governed by applicable 
law.
    First, the proposed rule change codifies current practice by 
explicitly stating that parties may represent themselves in 
arbitration.
    Second, the proposed rule change codifies current practice 
permitting the multi-jurisdictional practice of law by attorneys in the 
NASD Dispute Resolution forum to the extent permitted by state law. In 
addition, the proposed rule change states that if a party chooses to be 
represented by an attorney, the attorney must be licensed to practice 
in a U.S. jurisdiction and be

[[Page 56411]]

in good standing in that jurisdiction.\6\ NASD stated that requiring an 
attorney to be licensed and in good standing in a U.S. jurisdiction 
will protect investors by prohibiting individuals who have been 
suspended from the practice of law or disbarred from representing 
parties in the NASD forum. Further, NASD stated that the requirement 
for an attorney to be licensed to practice in a U.S. jurisdiction sets 
a standard of practice for its forum that is consistent with the other 
rules and proceedings of NASD.
---------------------------------------------------------------------------

    \6\ The requirement to be licensed to practice in a U.S. 
jurisdiction and be in good standing in that jurisdiction is in 
addition to and not in lieu of the requirement that an attorney must 
comply with applicable laws of the relevant jurisdiction. While the 
multi-jurisdictional practice of law may be permitted in many 
jurisdictions, it may constitute a violation of certain states' 
unauthorized practice of law provisions.
---------------------------------------------------------------------------

    Third, the proposed rule change addresses the representation of 
parties by non-attorneys in the NASD forum. Under the proposed rule 
change, parties may be represented in an arbitration or mediation by a 
person who is not an attorney, unless applicable law prohibits such 
representation or the person is currently suspended or barred from the 
securities industry in any capacity or is currently suspended from the 
practice of law or disbarred.
    While this provision would be applicable to all arbitration claims, 
it may be particularly beneficial for certain investors that may have 
difficulty retaining an attorney on a contingency-fee basis. For 
example, investors with small claims may be unable to retain an 
attorney because the attorney may believe that the attorney's share of 
any award would be too small to justify the effort. In these 
circumstances, investors may benefit from being able to seek other 
assistance to resolve their arbitration or mediation claims for a more 
affordable fee.\7\ At the same time, NASD stated that such non-attorney 
representatives should not be persons who have been found by a 
regulatory body in essence to be unfit to represent clients or to 
conduct securities business with the public. Thus, to protect 
investors, the rule would prohibit non-attorney representatives who are 
currently suspended or barred from the securities industry, or are 
currently suspended from the practice of law or disbarred, from 
representing parties in the NASD Dispute Resolution forum.
---------------------------------------------------------------------------

    \7\ Consistent with current practice, the proposed rule would 
allow a relative, friend or associate to represent or assist a 
person (e.g., an elderly or disabled person) with his or her 
arbitration or mediation. In addition, law school securities 
arbitration clinics can provide investors with affordable legal 
representation. A securities arbitration clinic also can help an 
investor who has a smaller claim but is unable to hire an attorney, 
provided the investor qualifies for assistance. See How to Find an 
Attorney (for more information on clinic locations and eligibility 
requirements), available at: http://www.finra.org/ArbitrationMediation/StartanArbitrationorMediation/HowtoFindanAttorney/index.htm
.

---------------------------------------------------------------------------

    Last, the proposed rule change would allow an attorney to represent 
a client in an NASD arbitration or mediation held in any U.S. hearing 
location, regardless of the jurisdiction in which the attorney is 
licensed. An attorney's ability to represent clients in a jurisdiction 
in which he or she is not licensed, however, would be subject to the 
applicable law of that jurisdiction. The proposed rule change is not 
intended to preempt state law; it is intended to reflect current 
practice in the forum which, based on experience, indicates that the 
outcome of a dispute resolution proceeding depends more on the level of 
knowledge, training and skill of the attorneys, rather than the 
jurisdiction from which the attorneys received their license to 
practice.

III. Comment Summary and Response to Comments

    The Commission received five comments \8\ on the proposal and a 
response to comments.\9\ One commenter generally expressed support for 
the proposed rule change.\10\ The remaining four commenters opposed the 
proposed rule change and the NASD Response addressed these 
comments.\11\
---------------------------------------------------------------------------

    \8\ Canning, DiCarlo, Pace, Sacks, and Stein.
    \9\ See letter to Nancy Morris, Secretary, Commission, from 
Mignon McLemore, Assistant Chief Counsel, FINRA Dispute Resolution, 
dated September 17, 2007 (``NASD Response''). While FINRA had been 
formed at the time of the submission of the NASD Response, for ease 
of reference the term NASD is used throughout.
    \10\ Pace.
    \11\ Canning, DiCarlo, Sacks, and Stein. See also NASD Response.
---------------------------------------------------------------------------

    Three commenters expressed the view that there should be a uniform 
national rule governing who can represent a party in a NASD forum, 
rather than permitting the incorporation of state rules that may vary 
from jurisdiction to jurisdiction.\12\ These commenters suggested that 
NASD should adopt a uniform rule that would preempt contrary state 
laws.\13\ NASD indicated that it had determined that ``there is no 
overriding need for a uniform rule in this area, and that the continued 
compliance with state rules is in the best interests of all 
participants in its arbitration forum.'' \14\ NASD also noted that this 
position is consistent with its previous position with respect to 
arbitrator disclosure, distinguishing attorney qualification rules and 
rules regulating arbitration procedure.\15\
---------------------------------------------------------------------------

    \12\ Canning, DiCarlo, and Stein.
    \13\ Id.
    \14\ NASD Response.
    \15\ Id.
---------------------------------------------------------------------------

    Four commenters stated that the proposed rule change would penalize 
retroactively those persons who are currently suspended or barred from 
the securities industry by prohibiting them from representing a party 
in an arbitration or mediation proceeding.\16\ In their view, it would 
impose a new penalty on those who have had their misconduct adjudicated 
and sanctions imposed.\17\ NASD indicated that the rule is ``designed 
to protect investors'' and that at a minimum a non-attorney 
representative should not be ``a person whom a regulatory body has 
suspended or barred from representing clients or conducting securities 
business with the public.'' \18\
---------------------------------------------------------------------------

    \16\ Canning, DiCarlo, Sacks, and Stein.
    \17\ Id.
    \18\ NASD Response. NASD noted that ``[t]he proposal will apply 
prospectively as to representation on or after the effective date. 
If a barred or suspended individual is representing a party in a 
case pending on the effective date of the rule, he or she may 
continue to serve on that case, but may not serve on new ones.''
---------------------------------------------------------------------------

    In addition, in response to comments that the proposed rule may 
unduly limit investor choices,\19\ NASD stated that it believes that 
the limitations on the choice of representation under the proposed rule 
are appropriate and would protect investors.\20\
---------------------------------------------------------------------------

    \19\ Canning, DiCarlo, Sacks, and Stein.
    \20\ Id.
---------------------------------------------------------------------------

IV. Discussion and Findings

    The Commission believes that the proposed rule change is consistent 
with the provisions of Section 15A(b)(6) of the Act,\21\ which 
requires, among other things, that NASD's rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest. The Commission believes that the 
proposed rule change meets this standard by balancing the needs of 
investors to have access to representation, particularly in small 
cases, with NASD's responsibility to protect investors, the integrity 
of its forum, and the public interest.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-NASD-2006-109), as amended, 
be, and hereby is, approved.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78s(b)(2).

[[Page 56412]]

---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-19536 Filed 10-2-07; 8:45 am]

BILLING CODE 8011-01-P