Document ID: SEC-2014-1099-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2014-07-03T04:00Z

[Federal Register Volume 79, Number 128 (Thursday, July 3, 2014)]
[Notices]
[Pages 38080-38086]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15607]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72491; File No. SR-FINRA-2014-028]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to 
Revisions to the Definitions of Non-Public Arbitrator and Public 
Arbitrator

June 27, 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 June 17, 2014, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') 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 refine and reorganize the definitions of 
``non-public arbitrator'' and ``public arbitrator.'' The amendments 
would, among other matters, provide that persons who worked in the 
financial industry for any duration during their careers would always 
be classified as non-public arbitrators, and persons who represent 
investors or the financial industry as a significant part of their 
business would also be classified as non-public arbitrators, but could 
become public arbitrators after a cooling-off period. The amendments 
would also reorganize the definitions to make it easier for arbitrator 
applicants and parties, among others, to determine the correct 
arbitrator classification.
    The text of the proposed rule change is available, at the principal 
office of FINRA, on FINRA's Web site at http://www.finra.org, 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

[[Page 38081]]

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 classifies arbitrators as ``non-public'' or ``public'' based 
on their professional and/or personal affiliations. The Code of 
Arbitration Procedure for Customer Disputes (``Customer Code'') and the 
Code of Arbitration Procedures for Industry Disputes (``Industry 
Code'') define these terms. The non-public arbitrator definition (Rules 
12100(p) and 13100(p)) lists financial industry affiliations that might 
qualify a person to serve as a non-public arbitrator in the forum. 
Conversely, the public arbitrator definition (Rules 12100(u) and 
13100(u)) itemizes affiliations that disqualify a person from serving 
as a public arbitrator in the forum. In general, public arbitrators do 
not have a significant affiliation with the financial industry.
    FINRA has amended its arbitrator definitions several times over the 
years to address constituent perceptions that an affiliation might 
affect an arbitrator's neutrality.\3\ The SEC approved the latest 
amendments in 2013 (the ``2013 amendments'').\4\ Under the 2013 
amendments, FINRA disqualified persons associated with a mutual fund or 
hedge fund from serving as public arbitrators. The 2013 amendments also 
provided that specified individuals must wait for two years after 
ending certain disqualifying affiliations (``cooling-off period'') 
before they may serve as public arbitrators.
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    \3\ See Securities Exchange Act Rel. No. 49573 (Apr. 16, 2004), 
69 FR 21871 (Apr. 22, 2004) (File No. SR-NASD-2003-95) and Notice to 
Members 04-49 (Jun. 2004); Securities Exchange Act Rel. No. 54607 
(Oct. 16, 2006), 71 FR 62026 (Oct. 20, 2006) (File No. SR-NASD-2005-
094) and Notice to Members 06-64 (Nov. 2006); and Securities 
Exchange Act Rel. No. 57492 (Mar. 13, 2008), 73 FR 15025 (Mar. 20, 
2008) (File No. SR-NASD-2007-021) and Regulatory Notice 08-22 (May 
2008).
    \4\ See Securities Exchange Act Rel. No. 69297 (Apr. 4, 2013), 
78 FR 21449 (Apr. 10, 2013) (File No. SR-FINRA-2013-003) and 
Regulatory Notice 13-21 (Jun. 2013).
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    The SEC received several comment letters on the 2013 amendments. 
Commenters recommended that FINRA increase the proposed two-year 
cooling-off period, add new categories of individuals whom FINRA would 
disqualify from serving as public arbitrators, and add new categories 
of individuals to the non-public arbitrator definition.\5\ In its 
response to the comment letters, FINRA asked the SEC to approve the 
proposed rule change as a significant measure to address constituent 
perceptions about the fairness and neutrality of the public arbitrator 
roster. FINRA staff agreed to conduct a comprehensive review in 
consultation with the National Arbitration and Mediation Committee 
(``NAMC''),\6\ of both the non-public arbitrator and public arbitrator 
definitions with a view towards clarifying the definitions and 
reviewing the additional issues raised in the comment letters.\7\
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    \5\ See Securities Exchange Act Rel. No. 69297 (Apr. 4, 2013), 
78 FR 21449 (Apr. 10, 2013) Discussion of Comment Letters. The 
comment letters are available on the SEC's Web site at www.sec.gov.
    \6\ The NAMC, which is composed of investor, industry, and 
neutral (arbitrator and mediator) representatives, provides policy 
guidance to FINRA Dispute Resolution staff. A majority of the NAMC 
members and its chair are public.
    \7\ See letter from Margo A. Hassan, Assistant Chief Counsel, 
FINRA Dispute Resolution, to Elizabeth M. Murphy, dated March 11, 
2013. The letter is available on FINRA's Web site at www.finra.org, 
and on the SEC's Web site at www.sec.gov.
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    FINRA staff met with the NAMC several times to review both 
arbitrator definitions. As the result of these discussions, as well as 
general discussions with interested groups over a period of time, FINRA 
is proposing to amend the non-public arbitrator and public arbitrator 
definitions. The intent of the proposed rule change is to address the 
concerns about arbitrator neutrality that were raised by the commenters 
on the 2013 amendments. As noted above, these concerns related to the 
cooling-off periods, the categories of individuals whom FINRA 
disqualifies from serving as public arbitrators, and the categories of 
individuals whom FINRA classifies as non-public arbitrators.
    The proposed rule change includes several substantive changes to 
the definitions and an extensive reorganization of the public 
arbitrator definition. In light of extensive revisions, FINRA is 
proposing to delete the definitions in their entirety, and replace them 
with new definitions. The proposed amendments are described below. For 
ease of reading, the discussion only refers to Rule 12100 of the 
Customer Code. The proposed amendments to Rule 13100 of the Industry 
Code are identical, and FINRA's rationale is the same.
Non-Public Arbitrator Definition
    The non-public arbitrator definition lists financial industry 
affiliations that might qualify a person to serve as a non-public 
arbitrator in the forum. The affiliations relate to individuals who 
work in the financial industry, and individuals who provide services to 
industry entities and their employees. Each qualifying affiliation has 
a corresponding disqualification in the public arbitrator definition. 
Currently, FINRA permits individuals who worked in the financial 
industry to join the public arbitrator roster after a cooling-off 
period so long as they meet other requirements.
    FINRA is proposing to expand the scope of the non-public arbitrator 
definition in three ways. First, the definition would provide that 
individuals who worked in the financial industry for any duration 
during their careers would always be classified as non-public 
arbitrators. Second, FINRA would add new categories of financial 
industry personnel who might qualify to serve as non-public 
arbitrators. Third, FINRA would add to the definition professionals who 
devote a significant part of their business to representing or 
providing services to parties in disputes concerning investments or 
employment relationships.
    Expansion of the non-public arbitrator definition becomes 
particularly significant when parties are selecting arbitrators in 
customer cases with three arbitrators.\8\ In these cases, FINRA sends 
the parties three randomly generated lists of arbitrators--a list of 10 
chair-qualified public arbitrators, a list of 10 public arbitrators, 
and a list of 10 non-public arbitrators. The parties select their panel 
through a process of striking and ranking the arbitrators on the lists. 
FINRA limits the parties to four strikes on the chair-qualified public 
arbitrator list and four strikes on the public arbitrator list. 
However, FINRA gives parties unlimited strikes on the non-public 
arbitrator list. By expanding the scope of the non-public arbitrator 
definition, parties would have a greater ability to address their own 
perceptions of bias through the use of their unlimited strikes on the 
non-public arbitrator list.
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    \8\ Under Rule 12401, one arbitrator hears customer claims up to 
$100,000 and three arbitrators hear customer claims of more than 
$100,000 or unspecified claims.
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New Rule 12100(p)(1)
    Under the current non-public arbitrator definition, if a person is 
currently, or was within the past five years, affiliated with a 
securities industry entity specified in the rule (e.g., associated with 
a broker or dealer), the person may qualify to serve as a

[[Page 38082]]

non-public arbitrator at the forum.\9\ Subject to two exceptions, FINRA 
allows these individuals to join the public arbitrator roster five 
years after ending all industry affiliation. The first exception to the 
five-year provision applies to persons who retired from, or who spent a 
substantial part of their career with, a specified industry entity.\10\ 
FINRA keeps these individuals on the non-public arbitrator roster for 
the duration of their service to the forum. The second exception 
applies to persons who were affiliated for 20 years or more with a 
specified industry entity.\11\ FINRA also keeps these arbitrators on 
the non-public arbitrator roster for the duration of their service.
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    \9\ See current Rule 12100(p)(1). This provision applies to a 
person who is, or was within the past five years:
    (A) Associated with, including registered through, a broker or 
dealer (including a government securities broker or dealer or a 
municipal securities dealer);
    (B) Registered under the Commodities Exchange Act;
    (C) A member of a commodities exchange or a registered futures 
association; or
    (D) Associated with a person or firm registered under the 
Commodity Exchange Act.
    \10\ See current Rule 12100(p)(2).
    \11\ See current Rule 12100(u)(2).
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    Investor representatives raised concerns about the neutrality of 
FINRA's public arbitrator roster because they do not believe that 
former industry-affiliated persons should ever serve as public 
arbitrators. In response to these concerns, FINRA is proposing to adopt 
new Rule 12100(p)(1) to eliminate the five-year cooling-off provision 
for persons who work in the financial industry. Under the new rule, 
FINRA would classify persons who are, or were, affiliated with a 
specified financial industry entity at any point in their careers, for 
any duration, as non-public arbitrators.\12\ Once FINRA classifies an 
arbitrator as non-public, FINRA would never reclassify the arbitrator 
as public. Under the proposed rule change, there would be no exceptions 
to this provision.
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    \12\ See new Rule 12100(p)(1). The financial industry 
affiliations enumerated in new Rule 12100(p)(1) relate to a person 
who is, or was, associated with, including registered through:
    (A) a broker or a dealer (including a government securities 
broker or dealer or a municipal securities broker or dealer); or
    (B) a member of, or an entity registered under, the Commodity 
Exchange Act, the Commodities Future Trading Commission, the 
National Futures Association, or the Municipal Securities Rulemaking 
Board; or
    (C) an entity that is organized under or registered pursuant to 
the Securities Exchange Act of 1934, Investment Company Act of 1940, 
or the Investment Advisers Act of 1940; or
    (D) a mutual fund or a hedge fund; or
    (E) an investment adviser.
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    FINRA is also proposing to add two new categories of financial 
industry professionals to new Rule 12100(p)(1)--persons associated 
with, including registered through, a mutual fund or hedge fund, and 
persons associated with, including registered through, an investment 
adviser. Currently, FINRA does not permit these professionals to serve 
in any capacity, but if they end their affiliation, they may serve as 
public arbitrators after a two-year cooling-off period.\13\ FINRA 
believes that these professionals would bring valuable knowledge and 
experience to the forum and that FINRA should classify them as non-
public arbitrators. Under the proposed rule change, once FINRA 
classifies them as non-public arbitrators, these arbitrators would 
remain on the non-public arbitrator roster for the duration of their 
service to the forum.
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    \13\ These persons may serve as non-public arbitrators if they 
are qualified to serve under another provision (e.g., dually 
registered as an investment adviser and an associated person of a 
FINRA member).
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    Finally, FINRA is proposing to add clarity to new Rule 12100(p)(1) 
by revising the references in several ways. First, instead of referring 
to a person registered under the Commodity Exchange Act, or associated 
with a person or firm registered under the Commodity Exchange Act, or a 
member of a commodities exchange, FINRA would simplify the reference in 
Rule 12100(p)(1)(B) by referring to a person who is, or was, associated 
with, including registered through, under, or with (as applicable), the 
Commodity Exchange Act or the Commodities Futures Trading Commission. 
FINRA is not proposing any substantive change to the categories of 
persons relating to commodities. Second, instead of referring to a 
member of a registered futures association, FINRA proposes in Rule 
12100(p)(1)(B) to specify the association by name--the National Futures 
Association. FINRA is not proposing any substantive change to the 
category of persons relating to futures. Third, FINRA is proposing to 
add in Rule 12100(p)(1)(B) a reference to a person who is, or was, 
associated with, including registered through, under, or with (as 
applicable), the Municipal Securities Rulemaking Board (``MSRB''). 
While such an individual would be covered under the current ``municipal 
securities broker or dealer,'' FINRA believes adding the MSRB would add 
clarity to the rule. Fourth, FINRA is proposing an omnibus reference in 
Rule 12100(p)(1)(C) to cover industry affiliated persons not otherwise 
specified in the rule and potential categories of industry 
professionals that may be created in the future.
New Rule 12100(p)(2)
    Under the current non-public arbitrator definition, attorneys, 
accountants, and other professionals who devoted 20 percent or more of 
their professional work in the last two years to serving specified 
industry entities and/or employees, may qualify to serve as non-public 
arbitrators at the forum.\14\ FINRA currently permits these individuals 
to join the public arbitrator roster two years after they stop 
providing services to the industry. However, they are permanently 
disqualified from serving as public arbitrators if they provided 
services to the industry for 20 years or more over the course of their 
careers.\15\
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    \14\ See current Rule 12100(p)(3). The rule applies to the 
persons and entities listed in current Rule 12100(p)(1).
    \15\ See current Rule 12100(u)(2).
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    FINRA is proposing to adopt new Rule 12100(p)(2) to broaden the 
current provision in two ways. First, the new rule increases the look-
back period from two years to five years. Second, it broadens 
application of the provision to include services to industry entities 
and any persons or entities associated with those industry entities. 
The proposed new public arbitrator definition provides that persons 
would be permanently disqualified from serving as public arbitrators if 
they provided the specified services for 15 calendar years or more over 
the course of their careers (in contrast to the current 20 year 
provision).\16\ The 15 years are a total number of years--they would 
not have to be consecutive years. After 15 years of service, FINRA 
would keep these arbitrators on the non-public arbitrator roster for 
the duration of their service to the forum. FINRA is increasing the 
look-back period, and decreasing the number of years before it applies 
a permanent disqualification, so that only individuals who are 
sufficiently removed from their industry affiliation are permitted to 
serve on the public arbitrator roster.
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    \16\ See new Rule 12100(u)(2).
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    Finally, FINRA is proposing to add clarity to the rule by changing 
the phrase ``professional work'' to ``professional time.'' FINRA staff 
believes that the term ``time'' is better because time would be more 
easily quantified by the professionals in the category.
New Rule 12100(p)(3)
    Currently, FINRA permits professionals who represent or provide

[[Page 38083]]

services to investors in securities disputes to serve as public 
arbitrators at the forum.\17\ Industry representatives raised concerns 
about the neutrality of the public arbitrator roster, and they do not 
believe that these professionals should serve as public arbitrators. To 
address these concerns, FINRA is proposing to add a new qualifying 
affiliation to the non-public arbitrator definition.
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    \17\ These individuals are not qualified under the non-public 
arbitrator definition to serve as non-public arbitrators, nor are 
they disqualified from serving as public arbitrators under the 
public arbitration definition.
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    Under new Rule 12100(p)(3), FINRA would classify as non-public 
arbitrators, attorneys, accountants, and other professionals who 
devoted 20 percent or more of their professional time, within the past 
five years, to serving parties in investment or financial industry 
employment disputes. FINRA selected the 20 percent threshold for 
application of the provision to keep it consistent with the threshold 
in new Rule 12100(p)(2).
    FINRA would permit these individuals to serve as public arbitrators 
five years after their business mix changes. However, if the person 
accumulates 15 calendar years of providing the qualifying services over 
the course of a career, FINRA would keep that arbitrator on the non-
public arbitrator roster for the duration of the arbitrator's service 
to the forum. The 15 years are a total number of years--they would not 
have to be consecutive years.\18\
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    \18\ See new Rule 12100(u)(3).
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New Rule 12100(p)(4)
    FINRA currently classifies as non-public arbitrators, persons 
working in a bank or other financial institution (e.g., a credit union) 
who execute transactions in securities or who supervise employees who 
execute transactions in securities.\19\ This provision covers persons 
who are not employed by an industry entity that falls under current 
paragraph (p)(1). When such persons end their affiliation, they may 
immediately apply to serve as public arbitrators at the forum unless 
they have engaged in this type of work for 20 years or more over the 
course of their careers.\20\
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    \19\ See current Rule 12100(p)(4).
    \20\ See current Rule 12100(u)(2).
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    FINRA is proposing to adopt new Rule 12100(p)(4) to add a five-year 
look-back period to this provision. The substance of the qualifying 
affiliation is the same. Only the look-back period is new. Under the 
new rule, FINRA would classify as a non-public arbitrator, any person 
who, within the last five calendar years, worked in a bank or other 
financial institution and executed transactions in securities or 
supervised or monitored compliance with the securities and commodities 
laws of employees who execute transactions in securities. FINRA would 
permit these persons to serve as public arbitrators five years after 
they ended their industry affiliation unless they provided these 
services for 15 years or more. As is the case with proposed new 
paragraphs (p)(2) and (p)(3) described above, the proposed new public 
arbitrator definition provides that these persons would be permanently 
disqualified from serving as public arbitrators if they provided the 
specified services for 15 calendar years or more over the course of 
their careers.\21\ Again, the 15 years are a total number of years--
they would not have to be consecutive years. After 15 years of service, 
FINRA would keep these arbitrators on the non-public arbitrator roster 
for the duration of their service to the forum.
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    \21\ See new Rule 12100(u)(4).
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Public Arbitrator Definition
    The public arbitrator definition lists affiliations that disqualify 
a person from serving as a public arbitrator in the forum. It includes 
a disqualification that corresponds to each qualifying affiliation in 
the non-public arbitrator definition. Currently, the definition 
reflects these disqualifications by cross-references to the non-public 
arbitrator definition. The public arbitrator definition includes 
additional disqualifiers that do not have a corresponding qualifier in 
the non-public arbitrator definition. Over the years, FINRA added these 
disqualifications to the public arbitrator definition to address 
investors' perceptions about the neutrality of the public arbitrator 
roster.
    FINRA is proposing substantive changes to the public arbitrator 
definition that: Add new disqualifications; amend an existing 
disqualification to simplify it; and revise the cooling-off periods. 
Under new Rule 12100(u), FINRA would subject individuals to a five-year 
cooling-off period after they end an affiliation based on their own 
activities, and a two-year cooling-off period after they end an 
affiliation based on someone else's activities (provided that another 
disqualification is not applicable).
    FINRA is also proposing to reorganize the public arbitrator 
definition to make it easier for FINRA staff, arbitrators and potential 
arbitrators, and parties to ascertain the correct arbitrator 
classification. Under the proposed rule change, FINRA would remove the 
cross-references between the definitions, and fully describe each 
disqualification. FINRA would also separate the disqualifications into 
categories of those that are permanent versus those that are temporary, 
and those based on a person's own activities versus those based on the 
activities of others (e.g., others at a person's firm). FINRA would 
repeat some of the disqualifying affiliations to make it clear that the 
affiliations are subject to both a temporary disqualification and a 
permanent disqualification depending on how many years a person was 
engaged in a stated activity.
New Rule 12100(u)(1)
    FINRA is proposing to adopt new Rule 12100(u)(1) to specify the 
types of financial industry employment that disqualify a person from 
serving as a public arbitrator.\22\ Substantively, the affiliations are 
identical to those listed in new Rule 12100(p)(1). None of the 
disqualifying affiliations is new--FINRA currently includes each of 
them in the public arbitrator definition.\23\ Rather, FINRA is 
proposing to add clarity to new Rule 12100(u)(1) by revising the 
references in a manner identical to what it is proposing for new Rule 
12100(p)(1).\24\
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    \22\ Under new Rule 12100(u)(1), A person shall not be 
designated as a public arbitrator who is, or was, associated with, 
including registered through:
    (A) a broker or a dealer (including a government securities 
broker or dealer or a municipal securities broker or dealer); or
    (B) a member of, or an entity registered under, the Commodity 
Exchange Act, the Commodities Futures Trading Commission, the 
National Futures Association, or the Municipal Securities Rulemaking 
Board; or
    (C) an entity that is organized under or registered pursuant to 
the Securities Exchange Act of 1934, Investment Company Act of 1940, 
or the Investment Advisers Act of 1940; or
    (D) a mutual fund or a hedge fund; or
    (E) an investment adviser.
    \23\ See current Rule 12100(u)(1) and Rule 12100(u)(3).
    \24\ First, instead of referring to a person registered under 
the Commodity Exchange Act, or associated with a person or firm 
registered under the Commodity Exchange Act, or a member of a 
commodities exchange, FINRA would simplify the reference in Rule 
12100(u)(1)(B) by referring to a person who is, or was, associated 
with, including registered through, under, or with (as applicable), 
the Commodity Exchange Act or the Commodities Futures Trading 
Commission. FINRA is not proposing any substantive change to the 
categories of persons relating to commodities. Second, instead of 
referring to a member of a registered futures association, FINRA 
proposes in Rule 12100(u)(1)(B) to specify the association by name--
the National Futures Association. FINRA is not proposing any 
substantive change to the category of persons relating to futures. 
Third, FINRA is proposing to add in Rule 12100(u)(1)(B) a reference 
to a person who is, or was, associated with, including registered 
through, under, or with (as applicable), the MSRB. While such an 
individual would be covered under the current ``municipal securities 
broker or dealer,'' FINRA believes adding the MSRB would add clarity 
to the rule. Fourth, FINRA is proposing an omnibus reference in Rule 
12100(u)(1)(C) to cover industry affiliated persons not otherwise 
specified in the rule and potential categories of industry 
professionals that may be created in the future.

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[[Page 38084]]

    FINRA currently permits non-public arbitrators to become public 
arbitrators at some point after ending their affiliations (subject to 
specified exceptions). As explained in the above discussion on new Rule 
12100(p)(1), under the proposed rule change, FINRA would classify these 
individuals as non-public arbitrators for the duration of their service 
to the forum and would never reclassify them as public arbitrators. 
Therefore, anyone disqualified under new Rule 12100(u)(1) would be 
subject to a permanent disqualification from the public arbitrator 
roster.
New Rules 12100(u)(2) and 12100(u)(6)
    Under the current public arbitrator definition, attorneys, 
accountants, and other professionals who devoted 20 percent or more of 
their professional work in the last two years to serving securities 
industry employees and/or entities, may not serve as public arbitrators 
at the forum.\25\ These individuals may join the public arbitrator 
roster two years after they stop providing services to the industry. 
However, FINRA permanently disqualifies them from the public arbitrator 
roster if they provided the services for 20 years or more over the 
course of their careers.\26\
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    \25\ See current Rule 12100(u)(1), which incorporates, among 
other things, current Rule 12100(p)(3).
    \26\ See current Rule 12100(u)(2).
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    FINRA is proposing to adopt new Rules 12100(u)(2) and 12100(u)(6) 
to expand the current provision. FINRA would broaden application of the 
disqualification to include services to financial industry entities and 
any persons or entities associated with those financial industry 
entities.\27\ In new Rule 12100(u)(6), FINRA would increase the 
cooling-off period in the rule from two years to five years,\28\ and in 
new Rule 12100(u)(2), FINRA would decrease the number of years for a 
permanent disqualification from 20 years to 15 years.\29\ The 15 years 
are a total number of years--they would not have to be consecutive 
years. Although the description of the disqualification in paragraphs 
(u)(2) and (u)(6) is identical, FINRA believes it would add clarity to 
the definition to separate out when the provision results in a 
permanent disqualification, and when it results in a temporary 
disqualification. Substantively, new Rules 12100(u)(2) and 12100(u)(6) 
are identical to new Rule 12100(p)(2).
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    \27\ See current Rule 12100(p)(3) for content to be expanded by 
new Rules 12100(u)(2) and 12100(u)(6).
    \28\ See current Rule 12100(u)(1), referencing current Rule 
12100(p)(3), which includes a two year look-back period.
    \29\ See current Rule 12100(u)(2) which references a 20 year 
time period.
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New Rules 12100(u)(3) and 12100(u)(7)
    As explained above, FINRA currently permits professionals who 
represent or provide services to investors in securities disputes to 
serve as public arbitrators at the forum. Industry representatives 
raised concerns about the neutrality of the public arbitrator roster, 
and they do not believe that these professionals should serve as public 
arbitrators.
    To address these concerns, FINRA is proposing to disqualify from 
the public arbitrator roster attorneys, accountants, expert witnesses, 
and other professionals who devote 20 percent or more of their 
professional time to serving parties in investment or financial 
industry employment disputes. Under new Rule 12100(u)(7), FINRA would 
apply a five-year cooling-off period to the rule. Under new Rule 
12100(u)(3), these persons would be permanently disqualified from 
serving as public arbitrators if they provide the specified services 
for 15 calendar years or more over the course of their careers. The 15 
years are a total number of years--they would not have to be 
consecutive years. The substance of the disqualification corresponds to 
the proposed qualifying affiliation in new Rule 12100(p)(3). FINRA 
selected the 20 percent threshold for application of the provision to 
keep it consistent with the thresholds in new Rules 12100(u)(2) and 
12100(u)(6).
New Rules 12100(u)(4) and 12100(u)(8)
    FINRA currently disqualifies personnel working in a bank or other 
financial institution (e.g., a credit union) who execute transactions 
in securities, or who supervise employees who execute transactions in 
securities, from serving as public arbitrators.\30\ This provision 
applies to persons who are employed by a financial industry entity that 
is not covered by current Rule 12100(p)(1). When these individuals end 
their affiliation, they may immediately apply to serve as public 
arbitrators at the forum unless they have engaged in this type of work 
for 20 years or more over the course of their careers.\31\
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    \30\ See current Rule 12100(u)(1) which references current Rule 
12100(p)(4).
    \31\ See current Rule 12100(u)(2).
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    FINRA is proposing to adopt new Rules 12100(u)(4) and 12100(u)(8) 
to expand the current provision. In new Rule 12100(u)(8), FINRA would 
impose a five-year cooling-off period in the rule; and, in new Rule 
12100(u)(4), FINRA would decrease the number of years for a permanent 
disqualification from 20 years to 15 years. The 15 years are a total 
number of years--they would not have to be consecutive years. Although 
the description of the disqualification in paragraphs (u)(4) and (u)(8) 
is identical, FINRA believes it would add clarity to the definition to 
separate out when the provision results in a permanent 
disqualification, and when it results in a temporary disqualification. 
Substantively, new Rules 12100(u)(4) and 12100(u)(8) are identical to 
new Rule 12100(p)(4).
New Rule 12100(u)(5)
    FINRA currently disqualifies individuals employed by, or who are 
directors or officers of, an entity that directly or indirectly 
controls, is controlled by, or is under common control with, any 
partnership, corporation, or other organization that is engaged in the 
securities business.\32\ These persons may become public arbitrators 
two years after ending their affiliation.\33\
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    \32\ See current Rules 12100(u)(6) and 12100(u)(7).
    \33\ See current Rule 12100(u).
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    FINRA is proposing to adopt new Rule 12100(u)(5) to expand 
application of the provision in two ways. First, FINRA would expand the 
disqualification from an ``organization that is engaged in the 
securities business'' to an ``organization that is engaged in the 
financial industry.'' Second, FINRA would increase the cooling-off 
period from two years to five years. This disqualification addresses 
the perception that employees, officers, and directors of entities that 
are associated with industry entities should not serve as public 
arbitrators because they may favor an industry party in an arbitration 
proceeding. The term ``financial industry'' would replace the term 
``securities business'' to ensure that the provision covers all 
financial services entities that may raise concerns about neutrality. 
The term securities business may be interpreted too narrowly to apply 
only to the affiliations in current Rule 12100(p)(1).

[[Page 38085]]

New Rule 12100(u)(9)
    Currently, professionals may not serve as public arbitrators if 
their firm: Derived 10 percent or more of its annual revenue in the 
past two years from providing services to the financial industry; \34\ 
or derived $50,000 or more in annual revenue in the past two years from 
providing services to the securities industry relating to customer 
disputes concerning an investment account or transaction.\35\ For 
example, a real estate attorney working at a law firm with a securities 
practice devoted to serving the industry is disqualified from serving 
as a public arbitrator if the threshold percentage or dollar figure is 
met. He or she may, however, become a public arbitrator two years after 
leaving the firm or two years after the firm no longer derives annual 
revenue from the financial industry or securities industry exceeding 
those thresholds.
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    \34\ See current Rule 12100(u)(4).
    \35\ See current Rule 12100(u)(5).
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    FINRA is proposing to adopt new Rule 12100(u)(9) to combine the two 
disqualifications into one, and to simplify the disqualification 
relating to the $50,000 threshold. New Rule 12100(u)(9) would provide 
that professionals may not serve as public arbitrators if their firm 
derived $50,000 or more, or at least 10 percent of its annual revenue, 
in any single calendar year during the course of the past two calendar 
years, from: The entities listed in paragraph (u)(1) and/or to any 
persons or entities associated with any of the entities listed in 
paragraph (u)(1); or from a bank or other financial institution where 
persons effect transactions in securities including government or 
municipal securities, commodities, futures, or options. The cooling-off 
period of two years would be the same. FINRA is proposing to remove the 
requirement that the $50,000 in revenue relate to customer disputes 
concerning an investment account or transaction to make it easier for 
potential and existing arbitrators to determine if the disqualification 
would apply.
New Rule 12100(u)(10)
    FINRA is proposing to adopt new Rule 12100(u)(10) to disqualify 
from the public arbitrator roster, professionals whose firm derived 
$50,000 or more, or at least 10 percent of its annual revenue, in any 
single calendar year during the course of the past two calendar years, 
from individual and/or institutional investors relating to securities 
matters. FINRA would apply a two-year cooling-off period to this 
provision. For example, a trust and estates attorney working at a law 
firm with a securities practice devoted to serving investors would be 
disqualified from serving as a public arbitrator if the threshold 
percentage or dollar figure is met.
    New Rule 12100(u)(10) is not based on an existing 
disqualification--it is entirely new. The purpose of this provision is 
to address an industry perception that a professional whose firm 
derives significant revenue from representing investors in securities 
matters in not neutral, and should not be permitted to serve as a 
public arbitrator. The revenue thresholds and cooling-off period are 
consistent with proposed new Rule 12100(u)(9).
New Rule 12100(u)(11)
    FINRA currently disqualifies individuals from serving as public 
arbitrators if their spouse or immediate family member is employed by, 
or is a director or officer of, an entity that directly or indirectly 
controls, is controlled by, or is under common control with, any 
partnership, corporation, or other organization that is engaged in the 
securities business.\36\ FINRA applies a two-year cooling-off period to 
these disqualifications.\37\ In addition, if an individual's spouse or 
immediate family member is employed in a securities industry entity or 
provides services to such an entity and/or the entity's employees, the 
person may not serve as a public arbitrator.\38\ While the current 
public arbitrator definition does not include a cooling-off period for 
this disqualification, it has been FINRA's practice to make these 
individuals wait for five years after their spouse or immediate family 
member ends the disqualifying affiliation before they may become public 
arbitrators.
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    \36\ See current Rules 12100(u)(6) and 12100(u)(7).
    \37\ See current Rule 12100(u).
    \38\ See current Rule 12100(u)(8).
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    FINRA is proposing to simplify these disqualifications and add 
clarity to them by combining them into one disqualification with a two-
year cooling-off period. New Rule 12100(u)(11) would provide that a 
person shall not be designated as a public arbitrator if his or her 
immediate family member is an individual whom FINRA would disqualify 
from serving on the public arbitrator roster. If the person's immediate 
family member ends the disqualifying affiliation, or the person ends 
the relationship with the individual so that the individual is no 
longer the person's immediate family member, the person may, after two 
calendar years have passed from the end of the affiliation or 
relationship, be designated as a public arbitrator. FINRA believes it 
is appropriate to have a two-year cooling-off period for all 
disqualifications based on the activities of others.
Immediate Family
    In the current public arbitrator definition, the term spouse 
appears in the disqualification text, not in the description of 
immediate family member. The term immediate family member includes a 
person's parent, stepparent, child, stepchild, or household member. It 
also includes an individual that the person supports financially,\39\ 
and an individual who is claimed as a dependent for federal tax 
purposes. FINRA is proposing to update the term to reflect current 
societal relationships. Under proposed new Rule 12100(u)(11), FINRA 
would add as immediate family members a person's spouse, partner in a 
civil union, and domestic partner.
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    \39\ Financial support is defined as providing an individual 
with more than 50 percent of his or her annual income.
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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,\40\ 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 
benefit users of FINRA's arbitration forum by addressing concerns 
raised about the fairness and neutrality of FINRA's public arbitrator 
roster. FINRA expects all arbitrators to be fair and neutral, and 
believes that they are. However, FINRA believes that it must address 
perceptions about the allegiances or inclinations of arbitrators that 
may erode confidence in the forum.
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    \40\ 15 U.S.C. 78o-3(b)(6).
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    FINRA believes that classifying any individual who worked in the 
financial industry for any duration as a non-public arbitrator would 
improve investors' views about the neutrality of the public arbitrator 
roster. FINRA also believes that classifying professionals who 
represent or provide services to parties in disputes concerning 
investment accounts or transactions as non-public arbitrators would 
enable all parties in customer cases with three arbitrators to address 
their perceptions about the neutrality of public arbitrator roster 
through the use of strikes during the panel selection process. 
Moreover, FINRA believes that including cooling-

[[Page 38086]]

off periods in the proposed public arbitrator definition would help 
ensure that potential arbitrators have sufficient separation from their 
financial industry affiliations before FINRA permits them to serve as 
public arbitrators.

B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments on the proposed rule change 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-2014-028 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-2014-028. 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-2014-028 and 
should be submitted on or before July 24, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-15607 Filed 7-2-14; 8:45 am]
BILLING CODE 8011-01-P