Document ID: SEC-2016-1587-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-09-06T04:00Z

[Federal Register Volume 81, Number 172 (Tuesday, September 6, 2016)]
[Notices]
[Pages 61288-61290]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21253]

[[Page 61288]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78729; File No. SR-FINRA-2016-033]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change Amending 
Rule 12400 of the Code of Arbitration Procedure for Customer Disputes 
and Rule 13400 of the Code of Arbitration Procedure for Industry 
Disputes Relating to Broadening Chairperson Eligibility in Arbitration

August 30, 2016.
    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 August 18, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been 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 FINRA Rule 12400 of the Code of 
Arbitration Procedure for Customer Disputes (``Customer Code'') and 
FINRA Rule 13400 of the Code of Arbitration Procedure for Industry 
Disputes (``Industry Code,'' and together with the Customer Code, the 
``Codes'') to provide that an attorney arbitrator would be eligible for 
the chairperson roster if he or she completes chairperson training and 
serves as an arbitrator through award on at least one arbitration, 
instead of two arbitrations, administered by a self-regulatory 
organization (``SRO'') in which hearings were held.
    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
Background
    FINRA rules require chairpersons, who play a vital role in the 
administration of arbitration cases, to have arbitrator experience and 
training to ensure the quality and efficiency of arbitrations. FINRA 
Rules 12400 and 13400 address the Neutral List Selection System 
(``NLSS'') \3\ and arbitrator rosters and provide, among other matters, 
that an arbitrator is eligible for the chairperson roster if he or she 
has completed chairperson training provided by FINRA and:
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    \3\ The NLSS is a computer system that generates, on a random 
basis, lists of arbitrators from FINRA's rosters of arbitrators for 
the selected hearing location for each proceeding. FINRA maintains a 
roster of non-public arbitrators (as defined in FINRA Rules 12100(p) 
and 13100(p)), a roster of public arbitrators (as defined in FINRA 
Rules 12100(u) and 13100(u)), and a roster of arbitrators who are 
eligible to serve as chairperson of a panel.
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     Has a law degree and is a member of a bar of at least one 
jurisdiction and has served as an arbitrator through award on at least 
two arbitrations administered by an SRO in which hearings were held (an 
``attorney arbitrator''); or
     Has served as an arbitrator through award on at least 
three arbitrations administered by an SRO in which hearings were held.
    FINRA's Office of Dispute Resolution (``ODR'') offers 71 hearing 
locations, including at least one in each state of the United States, 
one in San Juan, Puerto Rico, and one in London, UK. ODR maintains a 
diverse roster of approximately 6,750 arbitrators, of which 
approximately 3,060 are currently classified as public. Approximately 
1,000 of the 3,060 are chair-qualified. Despite the size of the public 
chairperson roster, forum users have raised concerns of a diminished 
public chairperson roster resulting from amendments to the ``public 
arbitrator'' definition that became effective on June 26, 2015.\4\ As a 
result of the amended public arbitrator definition, FINRA reclassified 
approximately 13.8 percent (487 out of 3,512) of its public arbitrator 
roster as non-public and approximately 2.6 percent (93 out of 3,512) of 
its public arbitrator roster were temporarily disqualified and made 
ineligible for service.\5\ Many of the arbitrators who were 
reclassified or disqualified were chair-qualified.
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    \4\ See Securities Exchange Act Release No. 74383 (February 26, 
2015), 80 FR 11695 (Order Approving Filing No. SR-FINRA-2014-028) 
(in part narrowing the public arbitrator definition by adding 
disqualifications relating to, among other things, affiliations with 
the securities industry concerning an arbitrator's family member or 
place of employment).
    \5\ There were an estimated 2,932 public arbitrators after the 
amended public arbitrator definition became effective. Arbitrator 
recruitment since July 2015 added approximately 128 to the public 
arbitrator roster, thereby reaching approximately 3,060 public 
arbitrators as of this rule filing.
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    Currently, the public chairperson roster in each hearing location 
ranges from fewer than 40 to over 200. Forum users recognize the risk 
that when the caseload increases, the ratio of cases to qualified 
public chairpersons is higher and FINRA may not have a sufficient 
number of public chairpersons on its roster.
    To expand the roster of public chairpersons in locations where the 
ratio of cases to qualified public chairpersons is higher, FINRA asks 
many public chairpersons to serve in multiple hearing locations. FINRA 
reimburses these chairpersons for their travel, lodging, and meals. 
However, party representatives have told FINRA staff that it is 
inconvenient to schedule hearings with out-of-town arbitrators. 
Moreover, during inclement weather, arbitrators may not be able to 
travel to the hearing location, which would then require parties to 
reschedule and incur additional costs. In addition, some forum users 
suggest that these arbitrators may also need instruction on the state 
laws, procedures, and customs for the hearing venue.
    FINRA has had limited success in enrolling new public chairpersons. 
One reason is that for the last few years, FINRA's arbitration caseload 
has remained low, and public arbitrators were not serving on a 
sufficient number of cases through award to meet the case experience 
requirements for attorney arbitrators outlined above. In 2015, only 24% 
of cases closed by award. However, thus far in 2016, there has been an 
increase in case filings (up 20% compared to the same period in 2015). 
If this trend persists, the need for more public chairpersons could 
outpace the qualification pipeline under the current eligibility 
criteria.
Proposed Amendments to Rules 12400(c) and 13400(c)
    FINRA is proposing to amend Rules 12400(c) and 13400(c) to provide 
that an

[[Page 61289]]

attorney arbitrator would be eligible for the chairperson roster if he 
or she completes chairperson training and serves as an arbitrator 
through award on at least one arbitration, instead of two arbitrations, 
administered by an SRO in which hearings were held. Reducing the case 
experience requirement from two arbitrations to one arbitration could 
add more than 270 attorney arbitrators across 59 of the 71 hearing 
locations, resulting in a nearly 30 percent increase in the number of 
arbitrators who might be eligible to serve as public chairpersons once 
they take chairperson training.
    FINRA is also proposing to replace the bullets in Rules 12400 and 
13400 with numbers for ease of citation.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\6\ which requires, among 
other things, that FINRA 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. FINRA believes that the proposed rule change would 
protect investors and the public interest by potentially increasing the 
number of eligible public chairpersons in all hearing locations, 
without negatively impacting the quality of the chairperson rosters. 
The proposal would address concerns raised by forum users of FINRA's 
diminished public chairperson roster resulting from the amended public 
arbitrator definition and the inconvenience of scheduling hearings with 
out-of-town arbitrators.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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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. Attorney arbitrators have the 
skillset to efficiently manage hearings and the experience to decide 
motions, among other matters. Their service as an arbitrator through 
award on one arbitration provides them with valuable experience 
regarding the arbitration forum. FINRA rules also require chairperson 
training before an attorney arbitrator becomes eligible to serve on a 
case as chairperson. The path to becoming chair-qualified is not 
mandatory however. ODR prompts candidates to register for chairperson 
training when they meet the other minimum qualifications. Any 
arbitrator who would like additional experience prior to serving as 
chairperson can defer the training until he or she gains that 
experience. In addition, ODR recently implemented a chairperson 
mentorship program to offer new chairpersons an additional resource for 
refining their chairperson skills. FINRA believes that by potentially 
increasing local chairpersons in hearing locations, FINRA would address 
forum users' concerns about scheduling out-of-town public chairpersons. 
Local arbitrators may also need less instruction on state laws, 
procedures, and customs. In addition, if the caseload increases, FINRA 
may not need to expand the use of public chairpersons from outside 
hearing locations, thereby avoiding additional forum user concerns.
    The proposed rule change is expected to provide a greater selection 
of local chairpersons for forum users, thereby potentially lowering 
instances in which chairpersons must travel. In addition, during the 
arbitrator selection process, FINRA supplies all parties with 
Arbitrator Disclosure Reports \7\ that include the arbitration case 
history for each potential arbitrator. Parties can strike arbitrators 
from the list for any reason. FINRA believes that the transparency of 
the Arbitrator Disclosure Report will continue to ensure that parties 
can make informed decisions regarding their chairperson selection and 
that the proposed rule change will increase the parties' choices.
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    \7\ The Arbitrator Disclosure Report contains background 
information about the potential arbitrator, such as the arbitrator's 
name, classification, skills, employment, education, training, 
conflict information, and any publicly available awards the 
arbitrator issued.
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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.

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

    Within 45 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 or disapprove 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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2016-033 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2016-033. 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 20549-1090, on official business days between the hours 
of 10 a.m. and 3 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-2016-033 and should be 
submitted on or before September 27, 2016.

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-21253 Filed 9-2-16; 8:45 am]
 BILLING CODE 8011-01-P