Document ID: SEC-2012-1821-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-11-08T05:00Z

[Federal Register Volume 77, Number 217 (Thursday, November 8, 2012)]
[Notices]
[Pages 67038-67040]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-27317]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68142; File No. SR-FINRA-2012-040]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Amend the By-
Laws of FINRA Dispute Resolution, Inc. To Clarify That Services 
Provided by Mediators Should Not Cause Them To Be Classified as 
Industry Members Under the By-Laws

November 2, 2012.

I. Introduction

    On August 23, 2012 the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and 
Rule 19b-4 thereunder,\2\ a proposed rule change to amend the By-Laws 
of FINRA Dispute Resolution, Inc. (``By-Laws'') to clarify that 
services provided by mediators, when acting in such capacity and not 
representing parties in mediation, should not cause the individuals to 
be classified as Industry Members under the By-Laws. Specifically, the 
proposed rule change would amend the definitions of Industry

[[Page 67039]]

Members \3\ and Public Members \4\ in the By-Laws to except any 
services provided in the capacity as a mediator of disputes involving a 
broker or dealer and not representing any party in such mediations from 
being considered professional services provided to brokers or dealers. 
The amended definitions would allow mediators who are otherwise 
qualified to be eligible to become Public Members of the National 
Arbitration and Mediation Committee (``NAMC''), a committee appointed 
by the Board of Directors of FINRA Dispute Resolution, Inc. (``DR 
Board''). The proposed rule change was published for comment in the 
Federal Register on September 11, 2012.\5\ The Commission received one 
comment letter, from an anonymous commenter on the proposed rule 
change.\6\ 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, on 
the Commission's Web site at http://www.sec.gov, and at the 
Commission's Public Reference Room.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Dispute Resolution By-Laws, Article I(s) (Definitions--
Industry Member).
    \4\ See Dispute Resolution By-Laws, Article I(x) (Definitions--
Public Member).
    \5\ See Exchange Act Release No. 67784 (Sept. 5, 2012), 77 FR 
55885 (Sept. 11, 2012). (``Notice''). The comment period closed on 
October 2, 2012.
    \6\ See Letter from anonymous commenter, dated October 2, 2012 
(``Comment Letter'').
---------------------------------------------------------------------------

    This order approves the proposed rule change.

II. Description of the Proposal

    The proposed rule change would amend the By-Laws to clarify that 
services provided by mediators when acting in such capacity and not 
representing parties in mediation should not cause the individuals to 
be classified as Industry Members under the By-Laws. Consequently, 
mediators who were otherwise qualified would be eligible to become 
Public Members of the NAMC would not be excluded because of the 
mediation activity excepted by the proposed rule. Currently, those 
mediators cannot become members of the NAMC because of the definitions 
of Industry Member and Public Member in the By-Laws.
    In a FINRA mediation, all parties agree on the selection of a 
mediator, agree on the compensation of the mediator, and agree on how 
to allocate the mediator's compensation among the parties; the mediator 
receives part of the compensation in each case from an industry party. 
However, for mediations to which investors are parties, mediators 
represent neither the investors nor the FINRA-registered individuals or 
entities. Similarly, for mediations involving industry parties only, 
mediators represent neither the FINRA-registered individuals nor 
entities.
    Pursuant to the Plan of Allocation and Delegation of Functions by 
FINRA to Subsidiaries (``Delegation Plan''), the NAMC has the power and 
authority pursuant to FINRA's Rules to advise the FINRA DR Board on the 
development and maintenance of an equitable and efficient system of 
dispute resolution that will equally serve the needs of public 
investors and FINRA members, to monitor rules and procedures governing 
the conduct of dispute resolution, and to have such other powers and 
authority as is necessary to effectuate the purposes of FINRA's 
Rules.\7\ The Delegation Plan provides that the FINRA DR Board must 
appoint the NAMC, whose membership must consist of a majority of Public 
Members.\8\
---------------------------------------------------------------------------

    \7\ See Plan of Allocation and Delegation of Functions by FINRA 
to Subsidiaries--NASD Dispute Resolution, Sec.  III(C)(1)(b).
    \8\ Id. See also Rules 12102(a) and 12102(a)(1) of the Code of 
Arbitration Procedure for Customer Disputes and Rules 13102(a) and 
13102(a)(1) of the Code of Arbitration Procedure for Industry 
Disputes.
---------------------------------------------------------------------------

    Currently, under the By-Laws, a mediator could be classified as an 
Industry Member rather than a Public Member for purposes of Committee 
participation because of the services provided by a mediator to an 
industry party. In FINRA's mediation forum, mediators are retained only 
by agreement of all parties to a dispute rather than by any one party 
and the parties compensate mediators jointly pursuant to that 
agreement. While mediators derive some of their revenue from brokers or 
dealers, FINRA has indicated that it does not believe the compensation 
earned in the capacity as a mediator compromises the mediator's 
neutrality.
    The proposed rule change would amend the definitions of Industry 
Members and Public Members in the By-Laws to except any services 
provided in the capacity as a mediator of disputes involving a broker 
or dealer and not representing any party in such mediations from being 
considered professional services provided to brokers or dealers.
    As explained in the Notice, FINRA believes that the proposed rule 
change is consistent with the provisions of Section 15A of the Act, 
including Section 15A(b)(2) of the Act,\9\ in that it provides for the 
organization of FINRA and FINRA Dispute Resolution in a manner that 
will permit FINRA to carry out the purposes of the Act, to comply with 
the Act, and to enforce compliance by FINRA members and persons 
associated with FINRA members with the Act, the rules and regulations 
thereunder, FINRA rules and other federal securities laws. FINRA also 
believes that the proposed rule change is consistent with Section 
15A(b)(4) of the Act,\10\ which requires, among other things, that 
FINRA's rules assure a fair representation of its members in the 
selection of its directors and administration of its affairs and 
provide that one or more directors shall be representative of issuers 
and investors and not be associated with a member of FINRA, broker or 
dealer. FINRA believes that the proposal would assure fair 
administration of its Dispute Resolution affairs by providing another 
source of qualified and experienced candidates from which to select 
public members for the NAMC.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78o-3(b)(2).
    \10\ 15 U.S.C. 78o-3(b)(4).
---------------------------------------------------------------------------

III. Discussion of Comment Letters

    The Commission received one comment letter on the proposed rule 
change in response to the Notice.\11\ The Comment Letter states that 
``the purpose of mediating or having a mediator is to forego the 
formalness. An industry member would have an upper-hand and expert 
knowledge. [T]hen the situation could be deemed a legal case.'' The 
Commission believes that the commenter is suggesting that members with 
industry experience would introduce formality into what is supposed to 
be an informal process.\12\ Notwithstanding its interpretation or the 
merit of the statement underlying its interpretation, the Commission 
believes that the proposed rule change simply prevents mediation 
activity from automatically qualifying the mediator as an Industry 
Member. It does not shield the mediator from being classified as an 
Industry Member for other activities that would otherwise cause the 
mediator to be considered an Industry Member.\13\
---------------------------------------------------------------------------

    \11\ Supra note 6.
    \12\ Because the commenter submitted the Comment Letter 
anonymously, neither the Commission not FINRA is able to seek 
clarification of the subject matter of the letter.
    \13\ In a telephone call with Mignon McLemore of FINRA on 
October 12, 2012, she stated that FINRA believes the Comment Letter 
is unclear and could not be clarified due to the anonymity of its 
author. Accordingly, FINRA believes that it could not respond to the 
letter.
---------------------------------------------------------------------------

IV. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
the comment received. Based on its review, the Commission finds that 
the proposed rule change is consistent with

[[Page 67040]]

the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities association. In particular, the 
Commission finds that the proposed rule change is consistent with the 
provisions of Section 15A of the Act, including Section 15A(b)(2) of 
the Act, in that it facilitates the organization of FINRA and FINRA 
Dispute Resolution in a manner that will permit FINRA to carry out the 
purposes of the Act, to comply with the Act, and to enforce compliance 
by FINRA members and persons associated with FINRA members with the 
Act, the rules and regulations thereunder, FINRA rules and other 
federal securities laws. The Commission also finds that the proposed 
rule change is consistent with Section 15A(b)(4) of the Act, which 
requires, among other things, that FINRA's rules assure a fair 
representation of its members in the selection of its directors and 
administration of its affairs and provide that one or more directors 
shall be representative of issuers and investors and not be associated 
with a member of FINRA, broker or dealer.
    More specifically, the Commission finds that by enlarging the pool 
from which to draw Public Members for the NAMC, the proposed rule 
change facilitates the organization of FINRA and FINRA Dispute 
Resolution in a manner consistent with Section 15A(b)(2) of the Act; 
the Commission also finds that enlarging the pool from which to draw 
Public Members for the NAMC facilitates compliance with and thus is 
consistent with the provision of Section 15A(b)(4) of the Act to 
provide that one or more of FINRA's directors shall be representative 
of issuers and investors and not be associated with a member of FINRA, 
broker-dealer.
    The Commission appreciates the commenter's letter about members 
with industry experience acting as mediators. However, the Commission 
believes that the proposed rule change simply prevents mediation 
activity from automatically qualifying the mediator as an Industry 
Member. It does not shield the mediator from being classified as an 
Industry Member for other activities that would otherwise cause the 
mediator to be considered an Industry Member.
    The Commission has reviewed the record for the proposed rule change 
and believes that the record does not contain any information to 
indicate that the proposed rule would have a significant effect on 
efficiency, competition, or capital formation. In light of the record, 
the Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation and has concluded that the proposed 
rule is unlikely to have any significant effect.\14\
---------------------------------------------------------------------------

    \14\ See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    For the reasons stated above, the Commission finds that the rule 
change is consistent with the Act and the rules and regulations 
thereunder.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-FINRA-2012-040) be, and it 
hereby is, approved.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27317 Filed 11-7-12; 8:45 am]
BILLING CODE 8011-01-P