Document ID: SEC-2013-1104-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2013-06-20T04:00Z

[Federal Register Volume 78, Number 119 (Thursday, June 20, 2013)]
[Notices]
[Pages 37267-37269]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-14682]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69762; File No. SR-FINRA-2013-023]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Amendments to the Code of Arbitration Procedure for Customer Disputes 
Concerning Panel Composition

June 13, 2013.
    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 3, 2013, 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 amend FINRA Rule 12403 of the Code of 
Arbitration Procedure for Customer Disputes (``Customer Code'') to 
simplify arbitration panel selection in cases with three arbitrators. 
Under the proposed rule change, FINRA would no longer require a 
customer to elect a panel selection method, and parties in all customer 
cases with three arbitrators would get the same selection method. FINRA 
would provide all parties with lists of ten chair-qualified public 
arbitrators, ten public arbitrators, and ten non-public arbitrators. 
FINRA would permit the parties to strike four arbitrators on the chair-
qualified public list and four arbitrators on the public list. However, 
any party could select an all-public arbitration panel by striking all 
of the arbitrators on the non-public list.
    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
    Under the Customer Code, parties in arbitration participate in 
selecting the arbitrators who serve on their cases. Until January 31, 
2011, the Customer Code contained one panel composition method for 
cases with three arbitrators (generally cases with claims of more than 
$100,000).\3\ This method provided for a panel of one chair-qualified 
public arbitrator, one public arbitrator, and one non-public 
arbitrator. To begin the selection process, FINRA used the computerized 
Neutral List Selection System (``NLSS'') to generate random lists of 
ten chair-qualified public arbitrators, ten public arbitrators, and ten 
non-public arbitrators. The parties selected their panel through a 
process of striking and ranking the arbitrators on the lists generated 
by NLSS. The Customer Code permitted the parties to strike the names of 
up to four arbitrators from each list. The parties then ranked the 
arbitrators remaining on the lists in order of preference. FINRA 
appointed the panel from among the names remaining on the lists that 
the parties returned.
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    \3\ 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.
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    Customer advocates argued that the mandatory inclusion of a non-
public arbitrator in a three-arbitrator case raised a perception that 
FINRA Dispute Resolution's forum was not fair to customers. In order to 
address this perception, FINRA sought and received SEC approval to 
implement a new panel composition rule for customer cases with three 
arbitrators.\4\ Under current Rule 12403, customers may choose between 
two panel composition methods. The first method, the composition rules 
for majority public panel (Majority Public Panel Option), provides for 
a panel of one chair-qualified public arbitrator, one public 
arbitrator, and one non-public arbitrator. The Majority Public Panel 
Option is the same panel composition method that was in place prior to 
February 1, 2011, and it operates as described above.
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    \4\ See Securities Exchange Act Rel. No. 63799 (January 31, 
2011), 76 Federal Register 6500 (February 4, 2011), (File No. SR-
FINRA-2010-053) and Regulatory Notice 11-05 (February 2011).
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    The second method, the composition rules for optional all public 
panel (All Public Panel Option), allows any party to select an 
arbitration panel consisting of three public arbitrators. Under this 
provision, FINRA sends the parties the same three lists of randomly 
generated arbitrators that they would have received under the Majority 
Public Panel Option, but FINRA allows each party to strike any or all 
of the arbitrators on the non-public arbitrator list. FINRA will not 
appoint a non-public arbitrator if the parties individually or 
collectively strike all the arbitrators appearing on the non-public

[[Page 37268]]

list or if all remaining arbitrators on the non-public list are unable 
or unwilling to serve for any reason. In either instance, FINRA will 
select the next highest-ranked public arbitrator to complete the panel. 
By striking all the arbitrators on the non-public list, any party can 
ensure that the panel will have three public arbitrators.
    Under Rule 12403, a customer may choose a panel composition method 
in the statement of claim (or accompanying documentation) or at any 
time up to 35 days from service of the statement of claim. In the 
absence of an affirmative choice by the customer, the Majority Public 
Panel Option is the default composition method. To ensure that the 
customer understands the options available, FINRA notifies the customer 
in writing that the customer may elect the All Public Panel Option 
within 35 days from service of the statement of claim. In its letter to 
the customer, FINRA explains how each panel composition method works.
Customer Elections and Award Results
    Since implementation of the All Public Panel Option, customers in 
approximately three-quarters of eligible cases have chosen the All 
Public Panel Option.\5\ Customers using the Majority Public Panel 
Option have done so by default 77 percent of the time, rather than by 
making an affirmative choice (i.e., these customers did not make an 
election in their statement of claim or accompanying documentation, and 
did not respond to the follow-up letter FINRA sent).
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    \5\ The current panel composition rule went into effect on 
February 1, 2011. The percentage noted is for the period between 
February 1, 2011 and March 31, 2013.
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    As of March 31, 2013, customers selecting the All Public Panel 
Option have chosen to strike all of the non-public arbitrators in 66 
percent of the cases during the ranking process. Customers have ranked 
one or more non-public arbitrators in 34 percent of cases and four or 
more in 13 percent of cases proceeding under the All Public Panel 
Option. Industry parties have ranked one or more non-public arbitrators 
in 97 percent of cases and have ranked four or more non-public 
arbitrators in 90 percent of cases. FINRA has been tracking the results 
of arbitration awards decided by all public panels and majority public 
panels since implementation of the rule change. For the period February 
1, 2011 through March 31, 2013, investors prevailed 49 percent of the 
time in cases decided by all public panels and 34 percent of the time 
in cases decided by majority public panels.\6\
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    \6\ The results for awards issued by majority public panels 
include both instances where a customer selected the Majority Public 
Panel Option (affirmatively or by default), and instances where the 
parties selected a non-public arbitrator under the All-Public Panel 
Option.
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Proposal To Use One Panel Composition Method at the Forum
    Based on FINRA's experience with having two panel composition 
methods, FINRA is proposing to amend Rule 12403 to use one panel 
composition method in all customer cases. The provisions in the All 
Public Panel Option as currently codified, with one clarifying change, 
would be the panel composition method for the forum. The clarifying 
change relates to striking and ranking arbitrators. Currently, Rule 
12403(d)(3)(B)(i) states that ``[e]ach separately represented party may 
strike up to four of the arbitrators from the chairperson and public 
arbitrator lists for any reason by crossing through the names of the 
arbitrators.'' FINRA is proposing to add clarity to that provision by 
amending it to state that ``[e]ach separately represented party may 
strike up to four of the arbitrators from the chairperson list and up 
to four of the arbitrators from the public arbitrator list for any 
reason by crossing through the names of the arbitrators.''
    FINRA believes that forum users would benefit by having one panel 
composition method for a number of reasons. First, having one panel 
composition method would simplify the arbitrator selection process for 
all parties and FINRA staff while leaving in place the method 
affirmatively chosen by customers in approximately three-quarters of 
customer cases. Second, it would ensure that every party has an 
opportunity to see the list of non-public arbitrators and rank or 
strike any or all of the arbitrators on the list. Third, the proposal 
would ensure that customers would not miss the opportunity to select an 
all public panel because of the inherent complexity of the rule. In its 
2011 order approving adoption of the All Public Panel Option, the SEC 
noted commenter concerns that customers without attorneys, or attorneys 
new to the practice of securities arbitration, might not elect the All 
Public Panel Option within the prescribed deadline, or might not 
appreciate the significance of making such an election.\7\ At that 
time, FINRA responded by implementing the notification procedure 
discussed earlier. The proposed rule change would further ameliorate 
the commenter concerns.
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    \7\ Supra note 3.
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Cross References
    To implement the proposal, FINRA is proposing to correct several 
cross references in the Customer Code.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\8\ 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 having one panel composition 
method, instead of the current two methods, would improve user 
experience at the forum. All parties would be subject to the same 
rules; there would be no confusion about panel composition; and less 
experienced parties would not be in the position to make an election 
that could inadvertently limit their options. For firms, one panel 
composition method brings certainty to the process and continues to 
assure that all parties have an opportunity to review the non-public 
arbitrator list.
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    \8\ 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. FINRA considered the potential 
impact of the proposed rule change on efficiency, competition, and 
capital formation. FINRA believes that simplifying the arbitrator 
selection process will improve the efficiency of administering cases at 
the forum and would not increase the burden on parties to the 
arbitration.
    The proposal would improve efficiency at the forum because FINRA 
staff would no longer be required to notify the customer in writing 
that the customer may elect the All Public Panel Option and would not 
have to wait for the 35-day period to expire before generating 
arbitrator lists. Improved efficiency may reduce expenses at the forum 
benefiting both investors and FINRA members.
    In addition, the proposed rule change would not increase the burden 
of panel selection on the parties. FINRA would continue to send the 
parties the same three lists of arbitrators and the task of reviewing 
and analyzing arbitrator backgrounds would be the same.

[[Page 37269]]

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-2013-023 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-2013-023. 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 
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-2013-023 and should be 
submitted on or before July 11, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-14682 Filed 6-19-13; 8:45 am]
BILLING CODE 8011-01-P