Document ID: SEC-2016-1694-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-09-20T04:00Z

[Federal Register Volume 81, Number 182 (Tuesday, September 20, 2016)]
[Notices]
[Pages 64564-64566]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22535]

[[Page 64564]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78836; File No. SR-FINRA-2016-022]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Amend Rule 
12403 (Cases With Three Arbitrators) of the Code of Arbitration 
Procedure for Customer Disputes Relating to the Panel Selection Process 
in Arbitration

September 14, 2016.

I. Introduction

    On July 1, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend FINRA Rule 12403 (Cases with Three 
Arbitrators) of the Code of Arbitration Procedure for Customer Disputes 
(``Customer Code'') relating to the panel selection process in 
arbitration. The proposal was published for comment in the Federal 
Register on July 15, 2016.\3\ The comment period closed on August 5, 
2016. The Commission received eight (8) comment letters on the 
proposal.\4\ On August 12, 2016, FINRA extended the time, until October 
13, 2016, for Commission action on the proposal.\5\ FINRA responded to 
the comment letters on August 18, 2016.\6\ This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 78279 (July 11, 
2016), 81 FR 46139 (July 15, 2016) (File No. SR-FINRA-2016-022) 
(``Notice'').
    \4\ See Letter from Steven B. Caruso, Maddox Hargett & Caruso, 
P.C., dated July 14, 2016 (``Caruso Letter''); Letter from Julius Z. 
Frager, J.D., M.B.A., dated July 24, 2016 (``Frager Letter''); 
Letter from Ryan K. Bakhtiari, Aidikoff, Uhl & Bakhtiari, dated July 
26, 2016 (``Bakhtiari Letter''); Letter from Philip M. Aidikoff, 
Aidikoff, Uhl & Bakhtiari, dated July 27, 2016 (``Aidikoff 
Letter''); Letter from Hugh D. Berkson, President, Public Investors 
Arbitration Bar Association (``PIABA''), dated August 4, 2016 
(``PIABA Letter''); Letter from David T. Bellaire, Esq., Executive 
Vice President and General Counsel, Financial Services Institute 
(``FSI''), dated August 4, 2016 (``FSI Letter''); Letter from Tyler 
M. Fiorillo, Student Intern, and Elissa Germaine, Supervising 
Attorney, Pace Investor Rights Clinic (``PIRC''), dated August 5, 
2016 (``PIRC Letter''), and Letter from Glenn S. Gitomer, Chair of 
Litigation Practice Group, McCausland Keen Buckman, dated August 5, 
2016 (``Gitomer Letter'').
    \5\ See Letter from Margo A. Hassan, Associate Chief Counsel, 
Office of Dispute Resolution, FINRA, to Lourdes Gonzalez, Assistant 
Chief Counsel--Sales Practices, Division of Trading and Markets, 
Securities and Exchange Commission, dated August 12, 2016.
    \6\ See Letter from Margo A. Hassan, Associate Chief Counsel, 
Office of Dispute Resolution, FINRA, to Brent J. Fields, Secretary, 
Securities and Exchange Commission, dated August 18, 2016 (``FINRA 
Response Letter'').
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II. Description of the Proposed Rule Change

    FINRA allows parties to participate in selecting the arbitrators 
who serve on their cases. Parties select their arbitration panel from 
computer generated lists of arbitrators that FINRA sends them. Under 
current FINRA Rule 12403(a), in customer cases with three 
arbitrators,\7\ FINRA sends the parties three lists: a list of ten (10) 
chair-qualified public arbitrators, a list of ten (10) public 
arbitrators, and a list of ten (10) non-public arbitrators.\8\ The 
parties select their panel through a process of striking and ranking 
the arbitrators on the lists.\9\ Under current Rule 12403(c)(2), each 
party is allowed to strike up to four (4) arbitrators on the chair-
qualified public list and four (4) arbitrators on the public list. At 
least six (6) names must remain on each list. However, Rule 12403(c)(1) 
provides for unlimited strikes on the non-public list so that any party 
may select a panel of all public arbitrators in a customer case.\10\
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    \7\ See FINRA Rule 12401, which provides that if the amount of a 
claim is more than $100,000, exclusive of interest and expenses, or 
is unspecified, or if the claim does not request money damages, the 
panel will consist of three arbitrators, unless the parties agree in 
writing to one arbitrator.
    \8\ Public arbitrators do not have an affiliation with the 
financial industry. The non-public arbitrator roster includes 
individuals who: (1) Are employed in the financial industry; (2) 
provide services to industry entities and their employees; or (3) 
devote a significant part of their business to representing or 
providing services to parties in disputes concerning investments or 
employment relationships. See Notice, 81 FR at 46139; see also 
Securities Exchange Act Release No 74383 (Feb. 26, 2014), 80 FR 
11695 (Mar. 4, 2014) (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 Non-Public Arbitrator and Public Arbitrator).
    \9\ See FINRA Rule 12403(c).
    \10\ See Notice, 81 FR at 46139.
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    Under the Customer Code, when parties collectively strike all of 
the non-public arbitrators from the list, FINRA fills all three panel 
seats from the two 10-person lists of public arbitrators.\11\ When 
parties collectively strike all of the arbitrators appearing on the 
non-public list, FINRA returns to the public list to select the next 
highest ranked available arbitrator to fill the seat.\12\ If no public 
arbitrators remain available to fill the vacancy, FINRA returns to the 
chair-qualified public list to select the next highest ranked public 
chair.\13\ In doing so, there is a likelihood that FINRA will appoint 
an arbitrator who the parties accepted, but ranked lower on the public 
or chair-qualified public lists.\14\ FINRA believes that where parties 
collectively strike all the non-public arbitrators (i.e., where they 
desire an all-public panel), the parties should have greater choice of 
public arbitrators.\15\
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    \11\ See FINRA Rule 12403(d), (e).
    \12\ See FINRA Rule 12403(e).
    \13\ Id.
    \14\ See Notice, 81 FR at 46139.
    \15\ Id.
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    Consequently, FINRA is proposing to amend Rule 12403(a)(1) to 
increase the number of arbitrators on the public arbitrator list FINRA 
sends the parties from ten (10) to fifteen (15). FINRA believes this 
amendment would provide the parties with greater choice of public 
arbitrators during the panel selection process.\16\
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    \16\ Id. at 46139-40.
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    FINRA is also proposing to amend Rule 12403(c)(2) to increase the 
number of strikes to the public arbitrator list from four (4) to six 
(6), so that the proportion of strikes is the same under the amended 
rule as it is under the current rule. FINRA believes that increasing 
the number of strikes the parties can make to the newly increased 
public list will improve the likelihood that the parties' preferred 
arbitrators will be appointed to the panel.\17\
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    \17\ Id. at 46140
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III. Summary of Comments and FINRA's Response

    The Commission received eight (8) comment letters on the proposed 
rule change,\18\ and a response letter from FINRA.\19\ As discussed in 
more detail below, six (6) commenters expressed support for the 
proposal as filed,\20\ one (1) commenter generally supported the 
proposal while expressing additional concerns,\21\ and one (1) 
commenter proposed an alternative approach for panel selection in 
customer cases.\22\ The sections below outline the support, concerns 
raised and alternatives proposed by commenters, as well as FINRA's 
response.
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    \18\ See supra note 4.
    \19\ See supra note 6.
    \20\ See Caruso Letter; Bakhtiari Letter; Aidikoff Letter; FSI 
Letter; PIRC Letter; Gitomer Letter.
    \21\ See PIABA Letter.
    \22\ See Frager Letter.
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Support for the Proposal

    Six (6) commenters supported the proposed increase in the number of 
arbitrators on the public arbitrator list from ten (10) to fifteen 
(15), as well as the proportional increase from four (4) to six (6) 
strikes that parties may make to the public arbitrator list. These 
commenters stated, among other things, that the proposal would provide 
parties

[[Page 64565]]

with a greater choice in the arbitrator selection process, increasing 
the likelihood that an arbitrator preferred by both parties would be 
appointed to the panel.\23\ Consequently, these commenters generally 
believe that the proposed rule change ``is a fair, equitable and 
reasonable approach[,]'' \24\ ``is an important step towards protecting 
the investing public[,]'' \25\ ``will greatly enhance the fairness of 
the forum to both the investing public and FINRA members[,]'' \26\ 
``results in more equitable arbitration proceedings,'' \27\ and 
``benefits all parties, with a particularly positive impact on modest-
means investors.'' \28\
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    \23\ See Caruso Letter, Aidikoff Letter, FSI Letter, and PIRC 
Letter; see also Bakhtiari Letter, Gitmore Letter and PIABA Letter 
(stating that ``having the ability to consider more candidates helps 
both claimants and respondents.''
    \24\ See Caruso Letter; see also Aidikoff Letter and FSI Letter.
    \25\ See Bakhtiari Letter.
    \26\ See Gitomer Letter.
    \27\ See FSI Letter.
    \28\ See PIRC Letter.
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Additional Concerns

    One (1) commenter generally supported the proposal, but also 
expressed concerns about other aspects of the arbitrator selection 
process.\29\ Specifically, this commenter believes that FINRA should 
address the shortage of local arbitrators by intensifying its efforts 
to recruit suitable local individuals to serve as public and 
chair[hyphen]qualified arbitrators, particularly in locations with 
shallow arbitrator pools.\30\ In addition, this commenter recommends 
that FINRA increase the transparency of its list-selection process.\31\
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    \29\ See PIABA Letter.
    \30\ Id.
    \31\ Id.
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    In response, FINRA stated that it believes this commenter's 
suggestions are outside the scope of the proposal.\32\ Therefore, FINRA 
did not address them in its response.\33\
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    \32\ See FINRA Response Letter.
    \33\ Id.
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Alternative Proposal

    One (1) commenter did not directly oppose the proposal but did 
recommend that FINRA adopt an alternative approach for panel selection 
in customer cases. Among other things, this commenter suggested that 
FINRA maintain the three current ten-person lists of non-public, chair-
public and public arbitrators. Each party could strike all of the names 
on the non-public list, and four names on each public list. Each party 
would then submit to FINRA one combined list of ranked chair-public and 
public arbitrators. FINRA would appoint the highest ranked chair-
qualified arbitrator as chair. If the parties collectively struck all 
of the non-public arbitrators, FINRA would then appoint two public 
arbitrators from those remaining on the parties' combined list 
(regardless of whether they are chair-qualified).\34\ The commenter 
believes that this proposal would benefit parties to an arbitration 
because, among other things, they would not need to vet the proposed 
additional five public arbitrators.\35\
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    \34\ See Frager Letter; see also FINRA Response Letter 
(describing the commenter's proposal).
    \35\ See Frager Letter.
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    In its response, FINRA stated that forum users generally prefer 
greater choice during the arbitrator selection process.\36\ FINRA also 
stated that unlike the commenter's suggestion, the proposed rule change 
would provide parties greater choice by adding five (5) public 
arbitrators to the panel selection process.\37\ In addition, FINRA 
believes that the commenter's approach to panel selection would be 
complex and difficult for parties to navigate, especially parties or 
party representatives that do not use the forum on a regular basis.\38\ 
Accordingly, FINRA did not amend the proposal to reflect the 
commenter's recommended amendments.
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    \36\ See FINRA Response Letter (stating that forum users have 
indicated that ``the benefits of additional choice outweigh the cost 
of vetting additional arbitrators'').
    \37\ See FINRA Response Letter.
    \38\ Id.
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IV. Discussion and Commission Findings

    The Commission has carefully considered the proposal, the comments 
received, and FINRA's response to the comments. Based on its review of 
the record, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\39\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\40\ 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. FINRA believes, and the Commission agrees, 
that the proposed rule change would protect investors and the public 
interest by providing greater choice for parties in customer cases with 
three arbitrators during the panel selection process.
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    \39\ In approving the proposed rule change, the Commission has 
also considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \40\ 15 U.S.C. 78o-3(b)(6).
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    As discussed above, the proposal would amend Rule 12403(a)(1) to 
increase the number of arbitrators on the public arbitrator list that 
FINRA sends the parties from ten (10) to fifteen (15).\41\ It would 
also amend Rule 12403(c)(2) to increase the number of strikes to the 
public arbitrator list from four (4) to six (6), so that the proportion 
of strikes is the same under the amended rule as it is under the 
current rule.\42\
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    \41\ See Notice, 81 FR at 46139.
    \42\ Id.
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    The Commission has considered the eight (8) comment letters 
received on the proposed rule change,\43\ along with FINRA's response 
to the comments.\44\ The Commission notes that most of the commenters 
support the proposed rule change, expressing the belief that the 
proposal would increase parties' choice among public arbitrators during 
the arbitrator selection process,\45\ and thereby benefit parties in 
arbitration and enhance the fairness of the forum.\46\ However, the 
Commission also recognizes commenters' concerns and suggestions.\47\
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    \43\ See supra note 4.
    \44\ See supra note 6.
    \45\ See supra note 23.
    \46\ See supra notes 24-28.
    \47\ See PIABA Letter and Frager Letter.
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    While the Commission acknowledges that FINRA's proposed amendments 
to Rule 12403 might result in an increased burden in vetting additional 
arbitrators, the Commission agrees with FINRA that parties would 
benefit from having greater choice in selecting public arbitrators, and 
that the benefits of this greater choice would outweigh the cost of 
additional vetting.\48\ The Commission additionally agrees with FINRA's 
assessment that the proposed alternative arbitrator selection process 
suggested by one commenter \49\ would not provide the benefit of 
greater choice and would unnecessarily complicate the arbitrator 
selection process.\50\
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    \48\ See FINRA Response Letter.
    \49\ See Frager Letter.
    \50\ See FINRA Response Letter.
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    In addition, the Commission agrees with FINRA's assessment that the 
``shortage of local arbitrators'' and the transparency of FINRA's 
arbitrator list-selection process \51\ are outside the scope of the 
proposal.\52\
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    \51\ See PIABA Letter.
    \52\ See FINRA Response Letter.
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    For the reasons stated above, the Commission finds that the 
proposed rule change is consistent with the Act

[[Page 64566]]

and the rules and regulations thereunder.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\53\ that the proposed rule change (SR-FINRA-2016-022) be, and 
hereby is, approved.
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    \53\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\54\
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    \54\ 17 CFR 200.30-3(a)(12).

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-22535 Filed 9-19-16; 8:45 am]
 BILLING CODE 8011-01-P