Document ID: SEC-2009-0881-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend Rules 12100, 12506, and 12902 of the Code of Arbitration Procedure for Customer Disputes and Rule 13100 of the Code of Arbitration Procedure for Industry Disputes To Implement Conforming Changes
Posted Date: 2009-07-02T04:00Z

[Federal Register: July 2, 2009 (Volume 74, Number 126)]
[Notices]               
[Page 31779-31781]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02jy09-102]                         

[[Page 31779]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60159; No. SR-FINRA-2009-041]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend 
Rules 12100, 12506, and 12902 of the Code of Arbitration Procedure for 
Customer Disputes and Rule 13100 of the Code of Arbitration Procedure 
for Industry Disputes To Implement Conforming Changes

June 22, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that Financial Industry Regulatory Authority, Inc. 
(``FINRA'' or the ``Corporation'') (f/k/a National Association of 
Securities Dealers, Inc. (``NASD'')) filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') on June 5, 2009, the 
proposed rule change as described in Items I, II, and III below, which 
Items have been substantially prepared by FINRA. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the Code of Arbitration Procedure for 
Industry Disputes (``Industry Code'') to amend Rules 12100(r), 
12506(a), and 12902(a) of the Code of Arbitration Procedure for 
Customer Disputes (``Customer Code'') and Rule 13100(r) of the Code of 
Arbitration Procedure for Industry Disputes (``Industry Code'') to 
amend the definition of ``associated person,'' streamline a case 
administration procedure, and clarify that customers could be assessed 
hearing session fees based on their own claims for relief in connection 
with an industry claim.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On January 24, 2007, the SEC approved amendments to the NASD Code 
of Arbitration Procedure (``old Code'') in connection with rules 
applicable to customer disputes and to industry disputes,\3\ a final 
step in the reorganization of the old Code into three separate 
procedural codes: the Customer Code, the Industry Code, and the 
Mediation Code (the ``Code Revision'').\4\ The Code Revision simplified 
the language of the old Code, codified current dispute resolution 
practices, and implemented several substantive changes to dispute 
resolution rules. Since the SEC approved the Code Revision, Dispute 
Resolution staff (``staff'') has found rule language that was omitted 
inadvertently from the Customer Code and the Industry Code 
(collectively, ``Codes''), as well as rule language that could be 
improved to better convey FINRA's intent or to clarify current practice 
regarding certain dispute resolution rules. To address these concerns, 
FINRA is proposing to amend:
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    \3\ See Securities Exchange Act Release No. 55158 (January 24, 
2007); 72 FR 4574 (January 31, 2007) (File Nos. SR-NASD-2003-158 and 
SR-NASD-2004-011).
    \4\ The Mediation Code was filed separately with the Commission 
as SR-NASD-2004-013. The Commission approved the Mediation Code on 
October 31, 2005, and it became effective on January 30, 2006. See 
Order Granting Approval to Proposed Rule Change and Amendments Nos. 
1 and 2 Thereto, and Notice of Filing and Order Granting Accelerated 
Approval to Amendment No. 3, to Amend NASD Rules for Mediation 
Proceedings, Securities Exchange Act Rel. No. 52705 (October 31, 
2005), 70 FR 67525 (November 7, 2005) (SR-NASD-2004-013).
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     Rules 12100(r) and 13100(r) of the Codes (the definition 
of ``person associated with a member'') so that the definition in the 
Codes conforms to the definition in FINRA's By-Laws;
     Rule 12506(a) of Customer Code (Document Production Lists) 
to encourage parties to download the Discovery Guide from FINRA's Web 
site instead of having a copy mailed to them automatically when a claim 
is filed; and
     Rule 12902(a) of the Customer Code (Hearing Session Fees, 
and Other Costs and Expenses) to clarify that the arbitrators may 
assess hearing session fees against a customer in connection with a 
claim filed by a member against a customer in cases where there is also 
a responsive customer claim.
    A discussion of the proposed amendments to each rule follows.
Rules 12100(r) and 13100(r)--Person Associated With a Member
    A ``person associated with a member'' or an ``associated person'' 
is an individual who is licensed by FINRA to buy and sell securities 
for a FINRA member and its customers.\5\ An associated person works for 
a member and, in most cases, is the individual with whom customers 
communicate to discuss their accounts or securities transactions.
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    \5\ Rules 12100(r) and 13100(r) define ``person associated with 
a member'' to mean:
    (1) A natural person registered under the Rules of FINRA; or
    (2) A sole proprietor, partner, officer, director, or branch 
manager of a member, or a natural person occupying a similar status 
or performing similar functions, or a natural person engaged in the 
investment banking or securities business who is directly or 
indirectly controlling or controlled by a member, whether or not any 
such person is registered or exempt from registration with FINRA 
under the By-Laws or the Rules of FINRA.
    For purposes of the Code, a person formerly associated with a 
member is a person associated with a member.
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    FINRA intended the definition of associated person in the Codes to 
match the By-Laws definition,\6\ except for one phrase relating only to 
Procedural Rule 8210. To that end, FINRA is proposing to amend Rules 
12100(r) and 13100(r) of the Codes to make these definitions consistent 
with the definition in FINRA's By-Laws. The proposal would amend the 
definition of ``person associated with a member'' in the Codes in two 
ways: (1) Insert the word ``other''

[[Page 31780]]

before the second reference to ``natural person'' to clarify that the 
definition does not include corporate entities; and (2) insert the 
criterion that a natural person includes someone who has applied for 
registration.
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    \6\ FINRA's By-Laws define ``person associated with a member or 
associated person of a member'' as (1) a natural person who is 
registered or has applied for registration under the Rules of the 
Corporation; (2) a sole proprietor, partner, officer, director, or 
branch manager of a member, or other natural person occupying a 
similar status or performing similar functions, or a natural person 
engaged in the investment banking or securities business who is 
directly or indirectly controlling or controlled by a member, 
whether or not any such person is registered or exempt from 
registration with the Corporation under these By-Laws or the Rules 
of the Corporation; and (3) for purposes of Rule 8210, any other 
person listed in Schedule A of Form BD of a member. See By-Laws of 
the Corporation, Article I, Definitions (rr).
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    FINRA believes that amending the definition in Rules 12100(r) and 
13100(r) to clearly exclude corporate entities from the definition of 
associated person would remove any ambiguity concerning how the 
definition will be applied. Further, amending these rules to expand the 
forum's jurisdiction to natural persons who have applied for 
registration would ensure that these individuals, who may be working in 
some capacity with a firm while awaiting their license, are subject to 
FINRA's rules, and hence would be required to arbitrate should a 
dispute involving them arise. Moreover, FINRA notes that this amendment 
would conform the definitions under the Codes to the Corporation's 
definition of person associated with a member.\7\
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    \7\ See supra note 6.
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Rule 12506--Document Production Lists
    During the arbitration process, parties can request discovery of 
documents, names of witnesses, and other information from each other to 
prepare their cases for the arbitration hearing. To help parties 
understand what information they should disclose, staff provides a copy 
of the FINRA Discovery Guide \8\ to parties when the Director serves 
the statement of claim. The Discovery Guide provides parties in 
customer cases with guidance on which documents they should exchange 
without arbitrator or staff intervention (called Document Production 
Lists) \9\ and provides guidance to arbitrators in determining which 
documents parties are presumptively required to produce.\10\
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    \8\ In January 1996, FINRA (then-NASD) created a Discovery Guide 
to assist customers in an arbitration with directing discovery and 
resolving discovery disputes. The Discovery Guide was approved by 
the SEC after a public comment period, see Exchange Act Release No. 
41833 (September 2, 1999), 64 FR 49256 (September 10, 1999). and was 
made available for use in arbitration proceedings involving customer 
disputes upon the publication of Notice to Members 99-90 (November 
1999).
    \9\ Many of the provisions of the Discovery Guide were 
incorporated into the Codes as part of the Code Revision. See supra 
note 3.
    \10\ Although there are discovery rules in each Code, the 
Discovery Guide applies only in customer arbitration disputes.
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    Rule 12506 of the Customer Code states that when the Director 
serves the statement of claim, ``the Director will provide the FINRA 
Discovery Guide and Document Production Lists to the parties.'' In 
light of the availability of Dispute Resolution forms, guides and the 
claim filing system on FINRA's Web site, FINRA believes that it is no 
longer necessary to disseminate the Discovery Guide to parties 
automatically when they file a claim in the dispute resolution forum. 
Further, many parties and counsel who use FINRA's arbitration forum are 
repeat users who are likely to have a current copy of the Discovery 
Guide in their files. Due to these circumstances, FINRA believes that 
automatic distribution of the Discovery Guide is not an efficient use 
of resources.
    Therefore, FINRA is proposing to amend Rule 12506(a) to state that, 
when the Director serves the statement of claim, the Director will 
notify parties of the location of the Discovery Guide (which includes 
the Document Production Lists) on FINRA's Web site, but will not 
provide a copy except upon request. FINRA believes the proposed change 
would enhance the efficiency of the case administration process, and 
would reduce FINRA's printing and mailing costs. Moreover, the proposal 
would encourage parties, especially those who frequently use the forum, 
to download relevant information from FINRA's Web site as needed.
Rule 12902--Hearing Session Fees, and Other Costs and Expenses
    Under the old Code, arbitrators could allocate hearing session fees 
against any party. Rule 10332(c) \11\ of the old Code protected 
customers from potentially higher forum fees (now hearing session fees) 
triggered by amounts sought in industry claims by prohibiting the 
arbitrators from assessing forum fees against customers if the industry 
claim was dismissed. Moreover, the rule protected customers from higher 
forum fees by requiring the amount of the forum fees to be based on the 
amount awarded to an industry party and not on the amount of damages 
requested by the industry claim. However, Rule 10332(c) also provided 
that customers could be fairly subject to potential forum fees based on 
their own claims for relief in connection with the industry claim.\12\
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    \11\ Rule 10332(c) of the old Code stated, in relevant part, 
that ``no fees shall be assessed against a customer in connection 
with an industry claim that is dismissed; however, in cases where 
there is also a customer claim, the customer may be assessed forum 
fees based on the customer claim.''
    \12\ For example, if a member filed a claim against a customer, 
and the arbitrators dismissed the claim, the customer would not be 
assessed any forum fees. However, if, in connection with the 
industry claim, the customer filed a counterclaim against the 
member, the customer would be subject to potential forum fees based 
on the customer's own claim for relief.
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    During the Code Revision, FINRA inadvertently omitted from the 
corresponding provision, Rule 12902(a)(4) of the Customer Code, the 
provision in old Rule 10332(c) that permitted the forum to assess fees 
against the customer based on the customer's claim in an industry 
dispute. Thus, FINRA is proposing to amend Rule 12902(a)(4) to 
incorporate the omitted language at the end of the rule. Specifically, 
the new language would state that ``in cases where there is also a 
customer claim, the customer may be assessed a filing fee under Rule 
12900(a), and may be subject to hearing session fees under Rule 
12902(a).''
    FINRA notes that the proposed amendment does not reflect a change 
in FINRA's stated policy or practice. Under the Customer Code, if a 
customer files a claim, counterclaim, cross claim or third party claim, 
Rule 12900(a)(1) requires the customer to pay a filing fee. Moreover, 
the first sentence of Rule 12902(a)(4) addresses the instance in which 
a customer may be assessed hearing session fees in connection with a 
claim filed by a member or associated person.\13\ Similarly, the 
proposed amendment to Rule 12902(a)(4) would make clear to customers 
that if they file a claim in connection with a claim filed by a member, 
they may be subject to filing fees and hearing session fees based on 
their own claim for relief. FINRA believes the proposed amendment would 
clarify the forum's policy concerning fees in connection with a 
customer counterclaim for relief and make the Code easier to administer 
for staff.
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    \13\ Rule 12902(a)(4) maintains the protection of old Rule 
10332(c) by requiring that ``the amount of hearing session fees the 
customer must pay must be based on the amount actually awarded to 
the member or associated person, rather than on the amount claimed 
by the member or associated person.''
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\14\ which requires, among 
other things, that the Association'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 proposed rule change is consistent with 
FINRA's statutory obligations under the Act to protect investors and 
the public interest because the proposal would ensure that individuals 
who have applied for registration are bound by FINRA's rules, and 
therefore subject to the jurisdiction

[[Page 31781]]

of the dispute resolution forum, and would assist in the efficient 
administration of the arbitration process by streamlining certain 
procedures and clarifying the allocation of hearing fees.\15\
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    \14\ 15 U.S.C. 78o-3(b)(6).
    \15\ The rationale for the proposed rule change was confirmed in 
a phone conversation with Mignon McLemore of FINRA, on June 22, 
2009.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received by FINRA.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2009-041 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2009-041. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. 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 the File 
Number SR-FINRA-2009-041 and should be submitted on or before July 23, 
2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-15610 Filed 7-1-09; 8:45 am]