Document ID: SEC-2010-0774-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-05-26T04:00Z

[Federal Register: May 26, 2010 (Volume 75, Number 101)]
[Notices]               
[Page 29594-29596]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26my10-97]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62134; File No. SR-FINRA-2010-022]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Amending the Codes of Arbitration Procedure to Increase the Number of 
Arbitrators on Lists Generated by the Neutral List Selection System

May 19, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 194 thereunder,\2\ notice is hereby given that 
on April 29, 2010, the 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 Rules 12403 and 12404 of the Code of 
Arbitration Procedure for Customer Disputes (``Customer Code'') and 
Rules 13403 and 13404 of the Code of Arbitration Procedure for Industry 
Disputes (``Industry Code'') to increase the number of arbitrators on 
each list generated by the Neutral List Selection System (``NLSS'').
    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
    The NLSS is a computer system that generates, on a random basis, 
lists of arbitrators from FINRA's rosters of arbitrators (i.e., public, 
non-public, and chair rosters) for each arbitration case. The parties 
select their panel through a process of striking and ranking the 
arbitrators on the lists.
    Currently, parties are sent lists of available arbitrators, along 
with detailed biographical information on each arbitrator. In a three-
arbitrator case, other than one involving a dispute among members, the 
parties receive three lists of eight arbitrators each--one public, one 
chair-qualified and one non-public. Each party is permitted to strike 
up to four of the eight names on each list and ranks the remaining 
names in order of preference. FINRA appoints the panel from among the 
names remaining on the lists that the parties return.\3\
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    \3\ In an arbitration between members, the panel consists of 
non-public arbitrators, and so the parties receive a list of 16 
arbitrators from the FINRA non-public roster, and a list of eight 
non-public arbitrators from the FINRA non-public chairperson roster. 
See FINRA Rules 13402 and 13403. Each separately represented party 
may strike up to eight of the arbitrators from the non-public list 
and up to four of the arbitrators from the non-public chairperson 
list. See FINRA Rule 13404.
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    When there are no names remaining on a list, or when a mutually 
acceptable arbitrator is unable to serve, a random

[[Page 29595]]

selection is made to ``extend the list'' by generating names of 
additional arbitrators to complete the panel. Parties may not strike 
the arbitrators on the extended lists, but they may challenge an 
arbitrator for cause (e.g., on the basis of conflict of interest).
    Prior to 2007, FINRA permitted parties unlimited strikes of 
proposed arbitrators on lists. This often resulted in parties 
collectively striking all of the arbitrators on each list generated 
through NLSS. When this occurred, staff would use NLSS to ``extend the 
list'' by generating names of additional arbitrators to complete the 
panel.
    Parties expressed concern about extended list arbitrator 
appointments because they could not strike arbitrators from an extended 
list. In response to this concern, in 2007, FINRA changed the 
arbitrator appointment process through a rule change that limited the 
number of strikes each party may exercise to four, in an effort to 
reduce the frequency of extended list appointments.\4\ Under the 
current rule, FINRA permits each party to strike up to four arbitrators 
from each list of eight arbitrators generated through NLSS and up to 
eight arbitrators from each list of 16 arbitrators generated through 
NLSS. The rules limiting strikes have significantly reduced extended 
lists and thus increased the percentage of cases in which FINRA 
initially appoints arbitrators from the parties' ranking lists. 
However, after each side exercises its strikes, typically only one or 
two persons remain eligible to serve on the case. Therefore, when FINRA 
grants a challenge for cause or an arbitrator withdraws, FINRA often 
must appoint the replacement arbitrator using an extended list. Forum 
users, including both investor and industry parties, continue to 
express concerns about extended list appointments.\5\
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    \4\ Exchange Act Release No. 55158 (January 24, 2007), 72 FR 
4574 (January 31, 2007) (File No. SR-NASD-2003-158).
    \5\ The rationale for the proposed rule change was confirmed in 
a phone conversation between Margo Hassan, FINRA Dispute Resolution, 
and Joanne Rutkowski, Division of Trading and Markets, Commission, 
May 18, 2010.
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    As a result of these concerns, FINRA is proposing to amend Rule 
12403 of the Customer Code to expand the number of arbitrators on each 
list (public, non-public, and public chairperson) generated through 
NLSS from eight arbitrators to 10 arbitrators. Thus, in every two party 
case, at least two arbitrators would remain on each list after 
strikes.\6\ The additional number of arbitrators will increase the 
likelihood that the parties will get panelists they chose and ranked, 
even when FINRA must appoint a replacement arbitrator. In cases with 
more than two parties, expanding the lists from eight to 10 arbitrators 
should significantly reduce the number of arbitrator appointments 
needed from extended lists.\7\
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    \6\ FINRA is not proposing to expand the number of allowable 
strikes for each party.
    \7\ Under the rules, each separately represented party is 
entitled to strike four arbitrators from an eight arbitrator list. 
If, for example, a case involves a customer, a member and an 
associated person, and each party is separately represented, even 
with 10 arbitrators there is a chance that all of the arbitrators 
will be stricken from the list.
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    FINRA is also proposing to amend Rule 13403 of the Industry Code to 
expand the number of arbitrators on lists generated through NLSS.\8\ 
For disputes between members, FINRA would expand the number of 
arbitrators on the non-public chairperson list generated through NLSS 
from eight arbitrators to 10 arbitrators and the number of arbitrators 
on the non-public list from 16 arbitrators to 20 arbitrators. For 
disputes between associated persons, or between or among members and 
associated persons, FINRA would expand the number of arbitrators on 
each list (public, non-public, and public chairperson) generated 
through NLSS from eight arbitrators to 10 arbitrators.
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    \8\ Again, FINRA is not proposing to expand the number of 
allowable strikes for each party.
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    FINRA considered whether increasing each list of arbitrators would 
be unduly burdensome for parties since parties would be reviewing the 
backgrounds of additional arbitrators during the ranking and striking 
stage of the arbitrator appointment process. In instances where FINRA 
appoints arbitrators by extended lists, parties still need to review 
arbitrators' backgrounds to determine, for example, whether to 
challenge an extended list arbitrator for cause.
    FINRA staff discussed expanding the lists with both investor and 
industry representatives, and asked the representatives to address the 
potential burden of reviewing additional arbitrators. The 
representatives uniformly stated that they would prefer to review 
additional arbitrators at the ranking and striking stage of the 
arbitrator appointment process in order to reduce the incidences of 
extended list appointments.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ 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. Forum users have criticized extended list appointments 
and asked FINRA to reduce the number of arbitrators appointed in this 
way. Expanding the number of arbitrators on lists generated through 
NLSS would reduce extended list appointments and would provide parties 
with more control in the arbitrator selection process because of the 
increased likelihood that arbitrators from each initial list would 
remain on the list after the parties complete the striking and ranking 
process. The proposal would enhance investor and industry participants' 
satisfaction with the arbitration process.
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    \9\ 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.

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 35 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 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

[[Page 29596]]

     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2010-022 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-2010-022. This 
file number should be included on the subject line if e-mail 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-2010-022 
and should be submitted on or before June 16, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-12625 Filed 5-25-10; 8:45 am]
BILLING CODE 8010-01-P