Document ID: SEC-2010-1734-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-11-12T05:00Z

[Federal Register Volume 75, Number 218 (Friday, November 12, 2010)]
[Notices]
[Pages 69481-69484]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-28419]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63250; File No. SR-FINRA-2010-053]

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

November 5, 2010.
    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 October 25, 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 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 the panel composition rule, and related 
rules, of the Code of Arbitration Procedure for Customer Disputes 
(``Customer Code''), to provide customers with the option to choose an 
all public arbitration panel in all cases.
    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 FINRA Dispute Resolution rules, parties in arbitration 
participate in selecting the arbitrators who serve on their cases. For 
customer claims of more than $100,000, the Customer Code currently 
provides for a three arbitrator panel \3\ comprised of a chair-
qualified public arbitrator, \4\ a public arbitrator, \5\ and a non-
public arbitrator.\6\ FINRA uses the computerized Neutral List 
Selection System (``NLSS'') to generate random lists of 10 arbitrators 
from each of these categories. The parties select their panel through a 
process of striking and ranking the arbitrators on the lists generated 
by NLSS. The Customer Code permits the parties to strike the names of 
up to four arbitrators from each list. The parties then rank the 
arbitrators remaining on the lists in order of preference. FINRA 
appoints the panel from among the names remaining on the lists that the 
parties return.
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    \3\ Rule 12401 provides for a single, chair-qualified public 
arbitrator if the amount of the claim is not more than $100,000. It 
provides for a three arbitrator panel if the amount of a claim is 
more than $100,000, or is unspecified, or if the claim requests non-
monetary damages. The parties, in claims of more than $25,000, but 
not more than $100,000, may agree in writing to have a three 
arbitrator panel.
    \4\ Rule 12400(c) specifies the criteria for arbitrator 
inclusion on the chairperson roster.
    \5\ Rule 12100(u) specifies the criteria FINRA uses to classify 
arbitrators as public.
    \6\ Rule 12100(p) specifies the criteria FINRA uses to classify 
arbitrators as non-public.
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    FINRA is proposing to amend the Customer Code to provide customers 
with the option to choose between two panel selection methods--the 
current panel selection method, which would be labeled ``Composition 
Rules for Majority Public Panel'' (``Majority Public Panel''), and a 
new panel selection method, which would be labeled ``Composition Rules 
for Optional All Public Panel'' (``Optional All Public Panel''). Under 
the proposed rule change, customers could choose the panel selection 
method; neither firms nor associated persons could choose the selection 
method.
    The Majority Public Panel option would continue to provide for a 
panel of one chair-qualified public arbitrator, one public arbitrator, 
and one non-public arbitrator, and would retain the current limit of 
four strikes for each arbitrator list. The new Optional All Public 
Panel provision, if chosen by the customer, would allow parties to 
select

[[Page 69482]]

an all public arbitration panel. Under this new provision, FINRA would 
send the parties the same three lists of randomly generated arbitrators 
that they would have received under the Majority Public Panel option, 
but FINRA would allow each party to strike any or all of the 
arbitrators on the non-public arbitrator list. If individually, or 
collectively, the parties struck all of the non-public arbitrators, 
FINRA would complete the panel by appointing a public arbitrator. Thus, 
by striking all the arbitrators on the non-public list, any party could 
ensure that the panel would have three public arbitrators.
    The proposed rule change would apply only to customer disputes. It 
would not apply to arbitrator selection in disputes involving only 
industry parties. FINRA believes giving customers the option of an all 
public panel will enhance confidence in and increase the perception of 
fairness in the FINRA arbitration process. All customers will have 
greater freedom in choosing arbitration panels, and any customer will 
have the power to have his or her case heard by a panel with no 
industry participants.
FINRA's Public Arbitrator Pilot Program
    Customer advocates argue that the mandatory inclusion of a non-
public arbitrator (often referred to as the ``industry'' arbitrator) in 
a three arbitrator case raises a perception that FINRA Dispute 
Resolution's current forum is not fair to customers. In order to 
address this perception, FINRA launched a pilot program (``the Pilot'') 
that allows parties to choose a panel of three public arbitrators 
instead of two public arbitrators and one non-public arbitrator.
    FINRA designed the Pilot to run for two sequential years, beginning 
October 6, 2008, and ending October 5, 2010. In Year One, 11 brokerage 
firms volunteered to participate in the Pilot, each contributing a set 
number of cases to the Pilot per year for two years. In Year Two, FINRA 
expanded the number of participating brokerage firms to 14 firms. In 
addition, several of the original participants increased their 
respective case commitments for Year Two. Participating firms agreed to 
extend the Pilot for a third year at the same case levels while the 
rule making process proceeds. Year Three of the Pilot began October 6, 
2010, and ends October 5, 2011, or upon implementation of the proposed 
rule change, whichever comes first.
    Under the Pilot, FINRA only permits a customer bringing the 
arbitration claim to decide whether his or her case should proceed 
under Pilot rules; the participating firms cannot select the Pilot 
cases. The parties receive the same three lists of proposed arbitrators 
that parties in non-Pilot cases receive. The difference is that, in the 
Pilot cases, any party can strike any or all of the arbitrators on the 
non-public list (as opposed to the four-strike limit for each party). 
If the parties rank one or more of the non-public arbitrators, FINRA 
appoints the highest ranked non-public arbitrator to the panel. If the 
parties strike all of the non-public arbitrators or if they are unable 
to serve, FINRA returns to the public arbitrator lists (the public list 
first, followed by the chair-qualified public list) to complete the 
panel. If no public arbitrators remain on the lists, FINRA uses NLSS to 
appoint randomly an additional public arbitrator. Thus, by striking all 
proposed non-public arbitrators, any party can choose a panel of three 
public arbitrators.
    Reactions from participants in the Pilot indicate that customer 
representatives strongly support the right of customers to decide 
whether to select any non-public arbitrator. That feedback has led 
FINRA to propose amending the panel composition rule for customer cases 
to allow the customer party to choose between the current panel 
selection method and the method used in the Pilot. Unlike the Pilot, 
however, the proposed rule would apply to all customer disputes against 
any firm and any individual broker.
Details of the Proposed Rule Change
    Currently, Rule 12402 (Composition of Arbitration Panels) specifies 
the panel composition for all customer cases.\7\ Rules 12403 
(Generating and Sending Lists to the Parties),\8\ 12404 (Striking and 
Ranking Arbitrators),\9\ 12405 (Combining Lists),\10\ 12406 
(Appointment of Arbitrators; Discretion to Appoint Arbitrators Not on 
List),\11\ and 12411 (Replacement of Arbitrators) enumerate the 
procedures for selecting, appointing, and replacing arbitrators.\12\ 
FINRA is proposing to consolidate these rules into two new rules: New 
Rule 12402 relating to customer cases with one arbitrator, and new Rule 
12403 relating to customer cases with three arbitrators. New Rule 12402 
would describe the procedures for selecting, appointing, and replacing 
the arbitrator in a single arbitrator case. New Rule 12403 would 
describe the two options that customers have for selecting arbitrators 
and would include the procedures for appointing and replacing 
arbitrators. The proposed rule change would apply to all customer 
cases.
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    \7\ Rule 12402 provides that a single arbitrator panel will 
consist of a chair-qualified public arbitrator, and that a three 
arbitrator panel will consist of a chair-qualified public 
arbitrator, a public arbitrator, and a non-public arbitrator.
    \8\ Rule 12403 provides that if a panel consists of one 
arbitrator, NLSS will generate a list of 10 chair-qualified public 
arbitrators. If a panel consists of three arbitrators, NLSS will 
generate a list of 10 chair-qualified public arbitrators, 10 public 
arbitrators, and 10 non-public arbitrators. Under the rule, NLSS 
excludes arbitrators from the list based on current known conflicts 
of interest identified in NLSS. The rule also details how NLSS 
generates the lists, and how FINRA sends lists to the parties and 
handles requests for additional information about arbitrators.
    \9\ Rule 12404 states that parties may strike up to four 
arbitrators from each list, leaving at least six arbitrator names 
remaining. It also explains the process for ranking arbitrator 
preferences and returning the lists to FINRA.
    \10\ Rule 12405 explains how FINRA prepares combined ranked 
lists of arbitrators based on the parties' numerical rankings.
    \11\ Rule 12406 explains that FINRA appoints the highest ranked 
available arbitrator from each of the combined lists and describes 
FINRA's procedures for appointing an arbitrator when the number of 
arbitrators available to serve from a combined list is not 
sufficient to fill the panel. The rule also provides that 
appointment occurs when FINRA sends notice to the parties of the 
names of the arbitrators on the panel and that arbitrators must 
execute FINRA's arbitrator oath or affirmation before making any 
decision as an arbitrator or attending a hearing.
    \12\ Rule 12411 provides that if FINRA removes an arbitrator, or 
an arbitrator becomes otherwise unable or unwilling to serve, FINRA 
appoints as a replacement arbitrator the arbitrator who is the most 
highly ranked available arbitrator from the applicable combined 
list. It also states the procedure for replacing an arbitrator if 
there aren't any arbitrators left on a combined list.
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    FINRA would delete current Rules 12402, 12403, 12404, 12405, 12406, 
and 12411 in their entirety. FINRA would renumber the remaining rules 
in the 12400 series so that the numbering would remain consecutive 
after FINRA consolidated the rules.
New Rule 12402--Cases With One Arbitrator
    New Rule 12402 (Cases with One Arbitrator) would consolidate the 
content of current Rules 12402, 12403, 12404, 12405, 12406, and 12411, 
relating to single arbitrator cases. FINRA is not proposing any 
substantive changes to the current procedures for selecting, 
appointing, and replacing arbitrators in cases with one arbitrator.
New Rule 12403--Cases With Three Arbitrators
    New Rule 12403 (Cases with Three Arbitrators) would provide 
customers with two options for panel selection in three arbitrator 
cases. The first option, the Majority Public Panel, would consist of 
the panel composition method currently provided in the Customer Code. 
It would ensure that FINRA appoints one non-public arbitrator on a 
three arbitrator panel. The second

[[Page 69483]]

option, the Optional All Public Panel (based on the Pilot), if selected 
by the customer, would guarantee that any party could select an all 
public panel. As stated above, the proposed rule change allows only 
customers to make the election between the two panel selection methods. 
If implemented as proposed, FINRA will allow any customer that has not 
been sent lists of arbitrators to choose between the two panel 
selection methods. Except as outlined below, FINRA would incorporate 
into new Rule 12403 the contents of current Rules 12403, 12404, 12405, 
12406, and 12411, that are pertinent to three arbitrator cases.
    Under the proposed rule change, the customers could elect either 
arbitrator selection method within 35 days from service of the 
Statement of Claim. If the customers declined to make an affirmative 
election by the 35-day deadline, FINRA would apply the composition rule 
for a Majority Public Panel.
    Under either panel selection option, the parties would receive 
three lists--i.e., one with 10 chair-qualified public arbitrators, one 
with 10 public arbitrators, and one with 10 non-public arbitrators. 
FINRA would permit each party to strike up to four arbitrators on the 
chair-qualified public and public lists, leaving at least six 
arbitrator names remaining on each party's list. However, the process 
for striking arbitrators on the non-public list would be different for 
each method, as detailed below.
    Majority Public Panel--This is the current method for panel 
composition. Under this method:
     Each separately represented party could exercise up to 
four strikes on the non-public list.
     FINRA would appoint the highest-ranked available non-
public arbitrator from the combined rankings.
     In cases in which the parties struck all of the 
arbitrators appearing on the non-public list or when all remaining 
arbitrators on the non-public list were unable or unwilling to serve 
for any reason, FINRA would appoint a non-public arbitrator selected 
randomly by NLSS.
    Optional All Public Panel--Under this method of panel composition:
     All parties would have unlimited strikes with respect to 
the non-public list (meaning that any party may strike up to all names 
on the non-public list).
     FINRA would not appoint a non-public arbitrator if the 
parties (individually or collectively) struck all the arbitrators 
appearing on the non-public list or if all remaining arbitrators on the 
non-public list were unable or unwilling to serve for any reason.
     If all non-public arbitrators were stricken or unavailable 
to serve, FINRA would select the next highest-ranked public arbitrator 
to complete the panel.
     If all public arbitrators were stricken or unavailable to 
serve, FINRA would select the next highest-ranked arbitrator on the 
public chair-qualified list.
     If all public chair-qualified arbitrators were stricken or 
unavailable to serve, FINRA would appoint a public arbitrator selected 
randomly by NLSS.
Additional Clarifying Provisions
    FINRA proposes to add clarity to Rules 12402 and 12403 by stating 
that parties are not required to send a copy of their ranking list to 
opposing parties.
    In addition, under the Optional All Public Panel method, FINRA 
would appoint a non-public arbitrator to a panel if the Director did 
not receive a party's ranked lists within the timeframe for returning 
lists to FINRA because the Director would proceed as though the party 
did not want to strike any arbitrator or have any preferences among the 
listed arbitrators. FINRA proposes to add clarity to the Optional All 
Public Panel provision by alerting parties that a failure to comply 
with the required timeframe for returning lists to FINRA may result in 
the appointment of a panel consisting of two public arbitrators and one 
non-public arbitrator.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\13\ 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 providing customers with choice on 
the issue of including a non-public arbitrator on the panel deciding 
their case will enhance customers' perception of the fairness of 
FINRA's rules and of its securities arbitration process.
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    \13\ 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 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2010-053 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-2010-053. 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

[[Page 69484]]

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-2010-053 and should be 
submitted on or before December 3, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-28419 Filed 11-10-10; 8:45 am]
BILLING CODE 8011-01-P