Document ID: SEC-2017-1277-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry RegulatoryAuthority, Inc.
Posted Date: 2017-07-28T04:00Z

[Federal Register Volume 82, Number 144 (Friday, July 28, 2017)]
[Notices]
[Pages 35248-35250]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-15909]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81196; File No. SR-FINRA-2017-025]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to 
the Definition of Non-Public Arbitrator

July 24, 2017.
    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 July 10, 2017, 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 FINRA Rule 12100 of the Code of 
Arbitration Procedure for Customer Disputes (``Customer Code'') and 
FINRA Rule 13100 of the Code of Arbitration Procedure for Industry 
Disputes (``Industry Code'' and together, ``Codes''), to define a non-
public arbitrator to mean a person who is otherwise qualified to serve 
as an arbitrator, and is disqualified from service as a public 
arbitrator under the Codes.
    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.

[[Page 35249]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose

    FINRA classifies arbitrators under the Codes as either ``non-
public'' or ``public.'' The Codes define these terms.\3\ The non-public 
arbitrator definition lists affiliations that might qualify a person to 
serve as a non-public arbitrator at the forum. Conversely, the public 
arbitrator definition enumerates criteria that disqualify an applicant 
from inclusion on the public arbitrator roster.
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    \3\ See FINRA Rules 12100(r) and 13100(r) for the definition of 
non-public arbitrator and Rules 12100(y) and 13100(x) for the 
definition of public arbitrator.
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    In 2015, the SEC approved amendments to the definitions of non-
public arbitrator and public arbitrator in the Codes.\4\ Among other 
things, the amendments provided that persons who worked in the 
financial industry for any duration during their careers would always 
be classified as non-public arbitrators and the amendments added new 
disqualifications to the public arbitrator definition relating to an 
arbitrator's provision of services to parties in securities arbitration 
and litigation and to revenues earned from the financial industry by an 
arbitrator's co-workers. The amendments also broadened the 
disqualifications based on the activities or affiliations of an 
arbitrator's family members. The intent of the proposed rule change was 
to address concerns about arbitrator neutrality raised by forum 
users.\5\ For example, prior to the 2015 amendments, the Codes, with 
specified exceptions, permitted former financial industry employees who 
ended their industry affiliations to qualify as public arbitrators five 
years after leaving the financial industry. Forum users raised concerns 
about the neutrality of these individuals, and indicated that they did 
not believe former industry employees should ever serve as public 
arbitrators. In response to these concerns, the 2015 amendments 
eliminated the five-year cooling-off period, thereby classifying all 
former financial industry employees as non-public arbitrators.
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    \4\ See Securities Exchange Act Rel. No. 74383 (February 26, 
2015), 80 FR 11695 (March 4, 2015).
    \5\ Regulatory Notice 15-18 (Definitions of Non-Public and 
Public Arbitrator) describes the changes made to the arbitrator 
definitions.
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    Under the definitions as revised in 2015, the non-public arbitrator 
roster is composed of individuals who work, or worked, in the financial 
industry, or provide services to the financial industry or to parties 
engaged in securities arbitration and litigation. The public arbitrator 
roster is composed of individuals who do not have any significant 
affiliation with the financial industry. These arbitrators have never 
been employed by the industry, do not provide services to the industry 
or to parties engaged in securities arbitration and litigation, and do 
not have immediate family members or co-workers who do so.

Eligibility Gap

    The 2015 amendments to the arbitrator definitions created an 
eligibility gap whereby certain otherwise qualified arbitrators \6\ 
could not serve in any capacity. The eligibility gap was created when 
FINRA narrowed the public arbitrator definition as described above. 
Over 800 public arbitrators were disqualified from the public 
arbitrator roster under the revised public arbitrator definition. In 
addition, more than 100 of these disqualified arbitrators did not meet 
any of the criteria outlined in the non-public arbitrator definition 
for service on the non-public arbitrator roster. As a result of this 
eligibility gap, FINRA removed them from service at the forum.
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    \6\ Unless waived by FINRA at its discretion, arbitrator 
applicants must have a minimum of five years of paid business and/or 
professional experience and at least two years of college-level 
credits. Qualification criteria can be found at http://www.finra.org/arbitration-and-mediation/finra-arbitrators.
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    In most instances, the basis for removal from the roster was an 
affiliation relating to an arbitrator's family members or co-workers. 
For example, a real estate attorney in a large law firm that has a 
securities practice would be disqualified from service as a public 
arbitrator if the firm derived $50,000 or more in a calendar year from 
providing services to securities entities. In addition, employment as a 
real estate attorney would not qualify the arbitrator to serve as a 
non-public arbitrator under the current definition. Therefore, the 
arbitrator falls into the eligibility gap. In addition to losing over 
100 public arbitrators, the eligibility gap required FINRA to reject 
over 140 arbitrator applicants in 2016 who met FINRA's minimum 
arbitrator qualifications.

Proposed Rule Change

    FINRA is proposing to amend the Codes to allow FINRA to appoint 
individuals to the non-public arbitrator roster if they meet FINRA's 
general arbitrator qualification criteria,\7\ but cannot be classified 
as public arbitrators. FINRA would amend the non-public arbitrator 
definition to delete the specific criteria for inclusion on the non-
public arbitrator roster. Instead, Rules 12100(r) and 13100(r) would 
provide that the term ``non-public arbitrator'' means a person who is 
otherwise qualified to serve as an arbitrator, and is disqualified from 
service as a public arbitrator.
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    \7\ See id.
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\8\ 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. Specifically, the proposed rule change would close the 
eligibility gap, simplify the non-public arbitrator definition, and 
provide greater choice for parties during the panel selection process.
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    \8\ 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. A key focus of the 2015 
amendments was the elimination of certain individuals from the public 
arbitrator roster. FINRA's intent was not to prevent these individuals 
from serving in any capacity. Hundreds of arbitrators or arbitrator 
applicants who formerly qualified to serve as public arbitrators are 
now unable to serve as arbitrators in the forum. As a result, the pool 
of eligible arbitrators has decreased, and FINRA is forced to turn away 
new candidates who would have been eligible to serve but for the recent 
amendments.
    The proposed rule change would permit these previously eligible 
persons to serve as non-public arbitrators. While not changing the 
public arbitrator definition as approved by the SEC in 2015, the 
proposed rule change would expand the pool of candidates eligible to 
serve as non-public arbitrators. FINRA considered revising the public 
arbitrator definition to close the eligibility gap, but chose to 
maintain the recently approved criteria that exclude individuals who 
have any significant affiliation with the financial industry. 
Increasing the number of qualified arbitrators benefits all parties who 
come before the forum because it permits parties to consider additional 
arbitrators during panel selection and may reduce

[[Page 35250]]

costs that arise due to an insufficient pool of qualified arbitrators 
such as the costs associated with arbitrators traveling from other 
hearing locations. Further, readmitting previously qualified persons 
increases the pool of experienced arbitrators, which strengthens the 
forum.
    The proposal would impose no direct or indirect costs on persons 
previously eliminated from acting as arbitrators, new candidates for 
arbitrator, or parties accessing the forum.

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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2017-025 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2017-025. This 
file number should be included on the subject line if email 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 
10:00 a.m. and 3:00 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-2017-025 and 
should be submitted on or before August 18, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-15909 Filed 7-27-17; 8:45 am]
 BILLING CODE 8011-01-P