Document ID: SEC-2008-0861-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-06-27T04:00Z

[Federal Register: June 27, 2008 (Volume 73, Number 125)]
[Notices]               
[Page 36579-36581]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jn08-109]                         

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SECURITIES AND EXCHANGE COMMISSION

 
[Release No. 34-58004; File No. SR-FINRA-2008-009] Self-
Regulatory Organizations; Financial Industry Regulatory Authority, 
Inc.; Order Approving Proposed Rule Change to the Code of Arbitration 
Procedure for Customer Disputes and the Code of Arbitration Procedure 
for Industry Disputes To Amend the Chairperson Eligibility Requirements

June 23, 2008.

I. Introduction

    On March 12, 2008, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') (f/k/a National Association of Securities Dealers, 
Inc. (``NASD'')) filed with the Securities and Exchange Commission 
(``SEC'' or ``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 relating to amendments to NASD 
Rule 12400(c) of the Code of Arbitration Procedure for Customer 
Disputes (``Customer Code'') and NASD Rule 13400(c) of the Code of 
Arbitration Procedure for Industry Disputes (``Industry Code''). The 
proposed rule change was published for comment in the Federal Register 
on March 25, 2008.\3\ The Commission received five comment letters in 
response to the proposed rule change.\4\ 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. 34-57529 (March 19, 
2008); 73 FR 15817 (Mar. 25, 2008).
    \4\ See letter from Scot D. Bernstein, dated April 4, 2008 
(``Bernstein letter''); letter from William A. Jacobson, Esq., 
Associate Clinical Professor, Director, Securities Law Clinic, 
Cornell Law School, dated April 15, 2008 (``Cornell letter''); 
letter from Lawrence S. Schultz, President, Public Investors 
Arbitration Association, dated April 16, 2008 (``PIABA letter''); 
letter from Karen Lockwood, dated May 12, 2008 (``Lockwood 
letter''); and letter from Barry D. Estell, Esquire, dated May 22, 
2008 (``Estell letter'').
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II. Description of the Proposed Rule Change

    The proposed rule change amends the chairperson eligibility 
requirements under Rule 12400(c) of the Customer Code and Rule 13400(c) 
of the Industry Code.
    On January 24, 2007, the SEC approved the Customer and Industry 
Codes (collectively referred to as

[[Page 36580]]

``Codes'').\5\ The Codes reorganized the dispute resolution rules into 
separate procedural codes, simplified the language of the old NASD Code 
of Arbitration Procedure, codified current practices, and implemented 
several substantive changes. One such substantive change involved 
improving the arbitrator selection process by creating and maintaining 
a new roster of arbitrators who are qualified to serve as chairpersons.
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    \5\ See Securities Exchange Act Release No. 55158 (January 24, 
2007); 72 FR 4574 (January 31, 2007) (File Nos. SR-NASD-2003-158 and 
SR-NASD-2004-011). The new Codes became effective on April 16, 2007.
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    Under the Codes, arbitrators are eligible for the chairperson 
roster if they have completed chairperson training provided by FINRA 
\6\ or have substantially equivalent training or experience, and 
satisfy one of two remaining requirements of the rule.\7\ In the rule 
filing proposing this change, FINRA explained that ``substantially 
equivalent training or experience would include service as a judge or 
administrative hearing officer, chairperson training offered by another 
recognized dispute resolution forum, or the like. Decisions regarding 
whether particular training or experience other than FINRA chairperson 
training would qualify under this provision would be in the sole 
discretion of the Director.'' \8\ In referring to the ``substantially 
equivalent training or experience'' criterion (hereinafter, 
``substantially equivalent''), the proposal also stated that FINRA 
believed that the proposal would allow arbitrators of all professional 
backgrounds to qualify as chairpersons.\9\ FINRA believed that this 
criterion would help ensure that the forum could meet the demands of 
the Codes concerning the new chairperson roster, while allowing FINRA 
to continue to administer effectively the arbitrator selection process.
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    \6\ Although some of the events referenced in this rule filing 
occurred prior to the formation of FINRA, the rule filing refers to 
FINRA throughout for simplicity.
    \7\ Rule 12400(c) of the Customer Code and Rule 13400(c) of the 
Industry Code.
    \8\ See Securities Exchange Act Release No. 51856 (June 15, 
2005); 70 FR 36442, at 36446 (June 23, 2005).
    \9\ Id.
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    In the year since the Codes were approved, FINRA has determined 
that the ``substantially equivalent'' criterion has not been essential 
to creating and maintaining the chairperson roster, and therefore 
proposed to remove this criterion from the rule. FINRA notes that all 
arbitrators currently coded as chairpersons have completed the FINRA 
Chairperson Training course (chair training),\10\ and the chair 
training has never been waived for an arbitrator claiming to satisfy 
the ``substantially equivalent'' criterion. FINRA believes that all 
arbitrators wishing to serve as chairpersons would benefit from the 
information contained in the chair training, which instructs 
arbitrators on the added responsibilities of arbitrators assuming the 
essential role of chairperson in the FINRA forum. Moreover, FINRA 
believes that removing the ``substantially equivalent'' criterion would 
make the chairperson eligibility standards more objective and uniform, 
thereby eliminating any perception that large numbers of arbitrators 
may be added to the chairperson roster without the benefit of the chair 
training.
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    \10\ The online Chairperson training course costs $50 and is 
available at http://www.finra.org/ArbitrationMediation/
ResourcesforArbitratorsandMediators/ArbitratorTraining/
ArbitratorTrainingPrograms/index.htm (last visited March 5, 2008).
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III. Comment Letters

    The Commission received five comment letters on the proposal.\11\ 
Three commenters opposed the proposal;\12\ one commenter urged the 
Commission to postpone taking final action on the proposed rule change 
pending further study;\13\ and one commenter offered no opinion on the 
proposal.\14\
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    \11\ See supra, footnote 3.
    \12\ Bernstein, PIABA and Estell letters.
    \13\ Cornell letter.
    \14\ Lockwood letter.
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    Two commenters argued that the amendments would further reduce the 
potential size of FINRA's pool of arbitrators who could be eligible to 
serve as chair by removing the ``substantially equivalent'' criterion 
from the rule.\15\
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    \15\ PIABA and Estell letters.
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    In a letter to the Commission, FINRA responded to these comments, 
stating that the proposal will not narrow the pool of arbitrators who 
could be eligible to serve as chair.\16\ FINRA explained that, in the 
year since the Codes were approved, the substantially equivalent 
criterion has proved irrelevant to creating and maintaining the 
chairperson roster.\17\ Further, FINRA explained that all arbitrators 
currently coded as chairpersons have completed the FINRA Chairperson 
Training course (chair training) and that FINRA has never waived the 
chair training for an arbitrator under the substantially equivalent 
criterion.\18\ Finally, FINRA suggested that this criterion has had no 
impact on its ability to maintain or expand the chairperson roster, and 
is therefore not necessary.\19\
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    \16\ See letter from Mignon McLemore, Assistant Chief Counsel, 
FINRA Dispute Resolution, dated June 2, 2008 (``FINRA letter'').
    \17\ FINRA letter.
    \18\ Id.
    \19\ Id.
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    Three commenters contended that by removing the substantially 
equivalent criterion, FINRA would be, in effect, implementing a 
mandatory arbitrator training requirement, which would give FINRA undue 
control over the arbitrators who may serve as chairs.\20\
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    \20\ Bernstein, PIABA and Estell letters.
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    FINRA responded that the proposal would, instead, result in less 
staff discretion because staff would not be assessing the arbitrator's 
prior experience or training to determine whether it was substantially 
equivalent to FINRA chair training.\21\ Under the proposal, arbitrators 
would be required to take FINRA's online chair training to become chair 
eligible. FINRA indicated that this requirement (which is easily 
measured) would make chair eligibility determinations more objective, 
because staff would not have to decide whether an arbitrator's 
experience meets the substantially equivalent threshold.\22\ FINRA 
stated that it believes the proposed amendments to the chair 
eligibility standards are reasonable and, along with the rule's other 
criteria, will provide investors with access to well-trained and well-
qualified arbitrators.\23\
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    \21\ FINRA letter.
    \22\ Id.
    \23\ Id.
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    One commenter suggested that chair training should not be a 
prerequisite to appointment as chair. \24\ Rather, the commenter 
suggested that FINRA could require that arbitrators, appointed as 
chair, complete the training prior to the initial pre-hearing 
conference (IPHC).\25\
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    \24\ Cornell letter at footnote 2.
    \25\ Cornell letter. See also FINRA letter, footnote 10, stating 
that ``a pre-hearing conference is a hearing session that takes 
place before the hearing on the merits. Rule 12100(t) of the 
Customer Code and Rule 13100(t) of the Industry Code.''
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    FINRA responded by stating that it has considered this suggestion, 
but concluded that it would be unworkable in its forum.\26\ FINRA 
pointed out that there could be instances in which an arbitrator is 
appointed as chair, but does not want to serve as the chair, refuses to 
take the chair training, or delays taking the training and does not 
complete it by the time of the IPHC.\27\ In such instances, FINRA 
explained, the case would be delayed while either the arbitrator is 
removed and another is appointed, or the IPHC is re-scheduled

[[Page 36581]]

to give the arbitrator additional time to take the training.\28\ FINRA 
also stated that this suggestion would create a significant 
administrative burden on staff, as staff would be required to monitor 
continuously the arbitrators' training reports to ensure that they have 
completed the chair training prior to IPHCs.\29\ For these reasons, 
FINRA declined to amend the proposal to implement this suggestion.\30\
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    \26\ FINRA letter.
    \27\ Id.
    \28\ Id.
    \29\ Id.
    \30\ Id.
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    One commenter requested that FINRA make available arbitrator 
selection records, beyond information publicly available from the 
Arbitration Awards Online database, so that it could be analyzed to 
determine whether arbitrators who award punitive or large compensatory 
awards are appointed to cases with less frequency due to strikes from 
industry parties, and whether the fragmentation of the random selection 
process through a chair-qualified slot exacerbates the problem.\31\
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    \31\ Cornell letter.
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    FINRA responded that its arbitrator selection records are 
proprietary and confidential.\32\ FINRA explained, that the arbitrator 
selection records are generated during the resolution of a private 
matter between parties and contain the parties' confidential 
information, such as their striking and ranking choices.\33\ Further, 
FINRA stated that it does not make this information available to the 
public because it could inhibit the parties' decisions during the 
arbitration process, which would compromise the integrity of the 
arbitration process.\34\ For these reasons, FINRA declined to make this 
information available.\35\
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    \32\ FINRA letter.
    \33\ Id.
    \34\ Id.
    \35\ Id.
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    Finally, four commenters objected to the existence of the separate 
chair roster.\36\ FINRA stated that it is not proposing to amend the 
structure of its arbitrator rosters in this rule filing.\37\ Further, 
FINRA noted that these same concerns were addressed by FINRA in 
connection with the proposal and adoption of the Codes,\38\ and the 
changes to the arbitrator rosters were approved by the SEC.\39\ FINRA 
stated that these comments are, therefore, outside the scope of the 
rule filing.\40\
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    \36\ Bernstein, Cornell, PIABA, and Estell letters.
    \37\ FINRA letter.
    \38\ Id. citing Response to Comments and Amendment No. 5, May 4, 
2006 (File No. SR-NASD-2003-158), at 21-22; see also Response to 
Comments and Partial Amendment 7, August 15, 2006 (File No. SR-NASD-
2003-158), at 8.
    \39\ FINRA letter.
    \40\ Id.
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IV. Discussion and Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act, and the rules 
and regulations thereunder that are applicable to a national securities 
association.\41\ In particular, the Commission believes that the 
proposed rule change is consistent with the provisions of section 
15A(b)(6) of the Act,\42\ because it would enhance the fairness and 
neutrality of FINRA's arbitration forum by making the chairperson 
eligibility rules more objective and uniform.
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    \41\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition and capital 
formation. See 15 U.S.C. 78c(f).
    \42\ 15 U.S.C. 78o-(b)(6).
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V. Conclusions

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\43\ that the proposed rule change (SR-FINRA-2008-009) be, and 
hereby is, approved.
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    \43\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
Florence E. Harmon,
Acting Secretary.
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    \44\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E8-14568 Filed 6-26-08; 8:45 am]

BILLING CODE 8010-01-P