Document ID: SEC-2009-0795-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-06-15T04:00Z

[Federal Register: June 15, 2009 (Volume 74, Number 113)]
[Notices]               
[Page 28318-28319]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15jn09-150]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60061; File No. SR-FINRA-2009-011]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change as Modified by 
Amendment No. 1 Thereto To Amend the Panel Composition Rules of the 
Code of Arbitration Procedure for Industry Disputes

June 5, 2009.
    On March 4, 2009, 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 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend the panel composition 
rules of the Code of Arbitration Procedure for Industry Disputes 
(``Industry Code''). On April 7, 2009, FINRA filed Amendment No. 1 to 
the proposed rule change. The proposed rule change, as modified by 
Amendment No. 1, was published for comment in the Federal Register on 
May 4, 2009.\3\ The Commission received no comments on the proposed 
rule change. This order approves the proposed rule change, as modified 
by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 59836 (April 28, 2009); 74 FR 
20519 (May 4, 2009).
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I. Description of the Proposal

    FINRA proposed to amend the Industry Code to change the criteria 
for determining the panel composition when the claim involves an 
associated person in industry disputes.
    Currently, Rule 13402(a) of the Industry Code requires an all non-
public panel for disputes between members, and for employment disputes 
between or among members and associated persons that relate exclusively 
to employment contracts, promissory notes, or receipt of 
commissions.\4\ In all other disputes between or among members and 
associated persons, Rule 13402(b) requires a majority public panel, 
where one arbitrator would be a non-public arbitrator and two would be 
public arbitrators.\5\
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    \4\ If the panel consists of one arbitrator, the arbitrator will 
be a non-public arbitrator selected from the non-public chairperson 
roster described in Rule 13400(c). See Rule 13402(a).
    \5\ If the panel consists of one arbitrator, the arbitrator will 
be a public arbitrator selected from the chairperson roster 
described in Rule 12400(c) of the Code of Arbitration Procedure for 
Customer Disputes (``Customer Code''). See Rule 13402(b).
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    FINRA proposed to amend the Industry Code to change the criteria 
for determining panel composition when the claim involves an associated 
person in industry disputes.\6\ Specifically, FINRA proposed to amend 
Rule 13402 and related rules of the Industry Code to:
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    \6\ The proposed changes discussed in this order will not apply 
to claims filed under the Customer Code.
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     Require that the parties receive a majority public panel 
for all industry disputes involving associated persons (excluding 
disputes involving statutory employment discrimination claims which 
require a specialized all public panel); \7\
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    \7\ The proposal would not apply to disputes involving a claim 
of statutory employment discrimination. See Rule 13802.
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     Clarify that in disputes involving only members, parties 
will receive an all non-public panel; and
     Provide that if a party amends its pleadings to add an 
associated person to a previously all member case, parties will receive 
a majority public panel.

Thus, cases involving only members would have an all non-public panel; 
cases involving a member and an associated person (excluding cases 
involving a claim for statutory discrimination) would have a majority 
public panel; and cases involving an associated person with a statutory 
discrimination claim would have a specialized all public panel.\8\ 
Moreover, if a member amends its pleadings to add an associated person, 
the case would receive a majority public panel, and the rules that 
apply to cases between associated persons and members would govern list 
selection and the administration of the arbitration proceeding.
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    \8\ See Rule 13802(c) (panel composition rule for statutory 
employment discrimination claims).
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Employment Disputes Involving Associated Persons

    Currently, in employment disputes between or among members and 
associated persons, FINRA requires that the panel consist of all non-
public arbitrators in cases that arise out of the employment or 
termination of employment of an associated person, and that relate 
exclusively to (1) employment contracts, (2) promissory notes, or (3) 
receipt of commissions. However, if a party adds a claim that does not 
meet these criteria, the parties receive a majority public panel.
    FINRA proposed to amend Rule 13402 of the Industry Code to clarify 
that for all employment disputes between or among members and 
associated persons (except for statutory employment discrimination 
cases), the parties must select a majority public panel.\9\ Rule 
13402(a) would be amended to delete the title of the rule, which 
contains the exceptions to the majority public panel requirement, and 
replace it with a concise description, which clarifies that Rule 
13402(a) would apply to disputes involving only members. Rule 13402(b) 
would be amended to modify the title of the rule to clarify that for 
all industry disputes involving associated persons (excluding disputes 
involving statutory employment discrimination claims), the parties 
would receive a majority public panel. FINRA also proposed to make 
similar title changes to Rules 13403(a) and 13403(b), which govern 
generating and sending lists to parties, and to Rules 13406(a) and 
13406(b), which govern appointment of arbitrators and discretion to 
appoint arbitrators not on the list.
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    \9\ The proposed change would be consistent with the rules and 
procedures of the former New York Stock Exchange (``NYSE'') 
arbitration forum. In the NYSE arbitration forum, cases involving 
associated persons received a majority public panel because the 
rules classified associated persons as non-members, and non-members 
received a majority public panel. See NYSE Rule 607(a)(1).

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[[Page 28319]]

Employment Disputes Involving Only Members

    FINRA proposed to amend Rule 13402(a) to clarify that, in disputes 
involving only members, the parties will receive an all non-public 
panel. FINRA noted that the proposed amendment to Rule 13402(a) is 
consistent with the current rule and its intent, which is that disputes 
involving only members should receive an all non-public panel.

Amendments to Pleadings That Add an Associated Person

    FINRA proposed to add a provision to Rule 13402(a) to address 
amended pleadings that add an associated person as a party. Under the 
proposed rule change, if a member in a dispute involving only members 
amends a pleading to add a party who is an associated person, the 
parties will receive a majority public panel. If lists of potential 
arbitrators have not been sent to parties, the Neutral List Selection 
System (NLSS) would generate three lists as outlined in Rule 
13403(b)(2) of the Industry Code. Specifically, FINRA would send a 
public chairperson list, a public arbitrator list, and a non-public 
arbitrator list. If the panel consists of one arbitrator,\10\ NLSS 
would generate a public chairperson list, and FINRA would send this 
list only to the parties.\11\
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    \10\ In a dispute between members, if the panel consists of one 
arbitrator, the arbitrator will be selected from FINRA's non-public 
chairperson arbitrator roster. See Rule 13402(a).
    \11\ See Rule 13403(b)(1). FINRA has raised the amount in 
controversy that will be heard by a single chair-qualified 
arbitrator to $100,000. The rule became effective on March 30, 2009. 
See Exchange Act Release No. 59340 (February 2, 2009), 74 FR 6335 
(February 6, 2009) (File No. SR-FINRA-2008-047); see also Regulatory 
Notice 09-13.
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    If the lists have been sent to parties but are not yet due, FINRA 
would send two new lists to the parties: A public chairperson list and 
a public arbitrator list as outlined in Rule 13403(b)(2).\12\ The 
parties would keep the non-public chairperson list provided to them as 
described in Rule 13403(a), and would select the non-public arbitrator 
from this list. The arbitrator selected from the public chairperson 
list would be the chairperson of the panel. If the panel consists of 
one arbitrator, FINRA would send only a new public chairperson list to 
the parties.\13\
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    \12\ Pursuant to Rule 13407(a), FINRA will send the list of non-
public arbitrators to the new party, with employment history for the 
past 10 years and other background information for each arbitrator 
listed. The newly added party may rank and strike arbitrators in 
accordance with Rule 13404.
    \13\ See note 8 supra.
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    If the ranked lists are due, then the parties may not amend a 
pleading to add a new party until a panel has been selected and the 
panel grants a motion to add the party.\14\ If the panel grants the 
motion to add an associated person, FINRA will retain the non-public 
chairperson from the panel, and remove the remaining non-public 
arbitrators.\15\ The parties would select two public arbitrators from 
new lists that FINRA would send to them in the same manner as if the 
ranked lists are not yet due. The arbitrator selected from the public 
chairperson list would be the chairperson of the panel. If the panel 
consists of one arbitrator and the arbitrator grants a motion to add an 
associated person, the arbitrator would be replaced with a public 
chair-qualified arbitrator that the parties select from a new public 
chairperson list that NLSS would generate.\16\
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    \14\ See Rule 13309(c) of the Industry Code.
    \15\ Pursuant to Rule 13407(b), the newly added party may not 
strike the non-public arbitrator but may challenge the arbitrator 
for cause in accordance with Rule 13410.
    \16\ See note 8 supra.
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II. Discussion

    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 applicable to a national securities 
association.\17\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\18\ in 
that it is designed, among other things, to prevent fraudulent and 
manipulative acts and practices; to promote just and equitable 
principles of trade; to remove impediments to and perfect the mechanism 
of a free and open market and a national market system; and, in 
general, to protect investors and the public interest.
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    \17\ In approving the proposed rule change, the Commission has 
considered the rule change's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the proposed rule change will protect 
the public interest by simplifying the criteria for panel composition 
in industry disputes, establishing an objective standard for 
determining panel composition, and ensuring that panel composition is 
determined by the types of parties involved, and not by the types of 
claims filed.

III. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities association.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-FINRA-2009-011), as modified 
by Amendment No. 1, be and hereby is approved.
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority. \20\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-13967 Filed 6-12-09; 8:45 am]

BILLING CODE 8010-01-P