Document ID: SEC-2012-0843-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-05-29T04:00Z

[Federal Register Volume 77, Number 103 (Tuesday, May 29, 2012)]
[Notices]
[Pages 31677-31680]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-12850]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67040; File No. SR-FINRA-2012-011]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change Amending FINRA 
Rule 14107 of the Code of Mediation Procedure To Provide the Director 
of Mediation With Discretion to Determine Whether Parties to a FINRA 
Mediation May Select a Mediator Who Is Not on FINRA's Mediator Roster

May 22, 2012.

I. Introduction

    On February 9, 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

[[Page 31678]]

Rule 19b-4 thereunder,\2\ a proposed rule change to amend FINRA Rule 
14107 of the Code of Mediation Procedure (``Mediation Code'') to 
provide the Director of Mediation (``Mediation Director'') with 
discretion to determine whether parties to a FINRA mediation may select 
a mediator who is not on FINRA's mediator roster, subject to certain 
conditions. The proposed rule change was published for comment in the 
Federal Register on February 28, 2011.\3\ The Commission received five 
comment letters on the proposed rule change,\4\ and a response to 
comments from FINRA.\5\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 66441 (Feb. 22, 2012), 77 FR 
12098 (Feb. 28, 2012) (``Notice''). The comment period closed on 
March 20, 2012.
    \4\ See Letter from Ryan K. Bakhtiari, President, Public 
Investors Arbitration Bar Association, dated February 28, 2012 
(``PIABA Letter''); letter from William A. Jacobson, Associate 
Clinical Professor of Law, Cornell Law School, and Director, Cornell 
Securities Law Clinic, and Patricia Peralta, Cornell Law School '13, 
dated March 15, 2012 (``Cornell Letter''); letter from Lisa 
Catalano, Director, Christine Lazaro, Supervising Attorney, and Ben 
Kralstein, Andrew Mundo, and Daniel Porco, Legal Interns, St. John's 
University School of Law Securities Arbitration Clinic, dated March 
20, 2012 (``St. John's Letter''); letter from Jill I. Gross, 
Director; Edward Pekarek, Assistant Director, and Genavieve Shingle, 
Student Intern, Investor Rights Clinic at Pace Law School, dated 
March 20, 2012 (``PIRC Letter''); and letter from Thomas K. Potter, 
III, Burr & Forman LLP, dated March 23, 2012 (``Potter Letter''). 
Comment letters are available at http://www.sec.gov.
    \5\ See Letter from Margo A. Hassan, Assistant Chief Counsel, 
FINRA Dispute Resolution, to Elizabeth M. Murphy, Secretary, 
Commission, dated April 30, 2012 (``Response Letter''). The text of 
the proposed rule change and FINRA's Response Letter are 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. The text of 
the Response Letter is also available on the Commission's Web site 
at http://www.sec.gov.
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II. Description of the Proposal

    As stated in the Notice, FINRA's Mediation Code currently permits 
parties to mediation to select a mediator either from a list of FINRA 
mediators supplied by the Mediation Director, or from a list or other 
source of their own choosing. Although parties usually select a FINRA 
mediator, parties may select a mediator who is not on FINRA's roster.
    FINRA has administered its mediation program for over 15 years. 
FINRA stated in the Notice that during this time it has developed a 
deep roster of seasoned securities mediators. Specifically, FINRA 
represented that its staff carefully screens every mediator applicant, 
and that the National Arbitration and Mediation Committee (``NAMC'') 
\6\ (through its Mediation Subcommittee) reviews and approves each 
application. FINRA stated that its staff then conducts a background 
check of approved applicants before placing them on the mediator 
roster. FINRA also stated that its staff engages in ongoing evaluation 
of the mediators on its roster by eliciting evaluations of its 
mediators from parties and counsel who have participated in mediation 
and conducting periodic quality control reviews of their mediators.
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    \6\ The NAMC makes recommendations to FINRA staff regarding 
recruitment, qualification, training, and evaluation of arbitrators 
and mediators. The NAMC also makes recommendations on rules, 
regulations, and procedures that govern the conduct of arbitration, 
mediation, and other dispute resolution matters before FINRA.
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    Non-FINRA mediators are not subject to FINRA's screening process, 
background check, and periodic evaluation. Accordingly, FINRA stated 
that the selection of a non-FINRA mediator raises concerns for the 
forum. FINRA stated, however, that if a mediator expresses an interest 
in applying to be a FINRA mediator, and FINRA's program would benefit 
by adding the mediator, FINRA staff believes it would be prudent to 
permit a non-FINRA mediator chosen by the parties to serve on a case. 
But FINRA stated that if a mediator does not apply for FINRA's roster 
or FINRA believes the mediator is not appropriate for its forum, the 
Mediation Director should have the discretion to deny the parties' 
mediator selection.
    For these reasons, in part, FINRA proposed to amend Rule 14107(a) 
to state that a mediator may be selected, with the Mediation Director's 
approval upon receipt of the parties' joint request, from a list or 
other source the parties choose. Under the proposed rule, if the 
Mediation Director rejects the mediator selected, the parties would 
still be able to select a FINRA approved mediator or a different non-
FINRA mediator subject to the same conditions as the rejected mediator, 
or to mediate their dispute elsewhere.
    FINRA Rule 14107(c) provides that a mediator selected or assigned 
to mediate a matter must comply with FINRA rules relating to 
disclosures required of arbitrators unless, with respect to a mediator 
selected from a source other than a list provided by FINRA, the parties 
elect to waive such disclosure. The proposed rule change would amend 
Rule 14107(c) to state that the paragraph would apply to a non-FINRA 
mediator who is approved to serve on a FINRA mediation.\7\
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    \7\ FINRA mediators pay an annual $200 fee to remain active on 
the roster. Additionally, FINRA deducts $150 from the mediator's 
compensation for each meditation in which the mediator participates 
(FINRA stated that mediators typically receive $250 to $500 per 
hour). The Notice stated that under the proposed rule FINRA would 
require the non-FINRA mediator to complete the application process 
for inclusion on the mediator roster. The Notice also stated that, 
if the Commission approves the proposed rule change, FINRA would 
require any non-FINRA mediator who serves on a case to pay the $200 
annual fee charged to FINRA mediators who are active on the roster 
prior to serving on the case, as well as the $150 mediation case 
fee.
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    The proposed rule change also would make two technical amendments 
to Rule 14107. It would amend Rule 14107(a) to change the bullet points 
to numbers to facilitate citation to particular provisions of Rule 
14107(a). It would also amend Rule 14107(c) to replace the citation to 
Rule 12408 of the Customer Code of Arbitration Procedure to Rule 12405 
to reflect that former Rule 12408 was re-numbered as part of a prior 
FINRA rule change.\8\
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    \8\ See Exchange Act Release No. 63799 (Jan. 31, 2011), 76 FR 
6500 (Feb. 4, 2011).
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    In the Notice, FINRA represented that giving the Mediation Director 
discretion to determine whether parties may select a mediator who is 
not on FINRA's mediator roster would protect the quality and integrity 
of the process for users of FINRA's mediation program.

III. Discussion of Comment Letters

    The Commission received five comment letters on the proposed rule 
change in response to the Notice.\9\ Two commenters supported the 
proposal,\10\ one supported the proposal with a suggested 
modification,\11\ and two opposed the proposal.\12\
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    \9\ Supra note 4.
    \10\ See PIABA Letter and St. John's Letter.
    \11\ See Cornell Letter.
    \12\ See PIRC Letter and Potter Letter.
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    The PIABA Letter stated that the proposed rule change would assist 
forum participants in resolving their disputes. The St. John's Letter 
stated that giving the Mediation Director discretion in approving 
mediators not on FINRA's roster would help to ensure quality and 
efficiency in mediation.
    The Cornell Letter stated that it supported the proposed rule 
change because FINRA should be able to control the quality of its 
mediation program. The letter also noted that, in the Notice, FINRA 
stated that if the Mediation Director rejects the parties' selected 
mediator, the parties would still be able to select a FINRA approved 
mediator or a different non-FINRA mediator subject to the same 
conditions as the rejected mediator, or to mediate their dispute 
elsewhere. The letter recommended that FINRA include this language in 
the proposed rule text or, alternatively, that the Commission 
acknowledge the language in an order approving the proposed rule 
change. In

[[Page 31679]]

its Response Letter, FINRA stated that it included the language in the 
Notice to call attention to the alternatives that would be available to 
forum users if the Mediation Director rejects the parties' chosen 
mediator. FINRA stated that it was unnecessary to include the suggested 
language in the rule text, and declined to amend the proposal. FINRA 
also represented that, if the Commission approves the proposed rule 
change, FINRA would include the suggested language in a Regulatory 
Notice announcing approval of the proposed rule change to ensure that 
parties are cognizant of their options under FINRA's program. In 
addition, FINRA stated that if the Mediation Director rejects the 
parties' chosen mediator, FINRA would notify the parties of the 
alternatives available to them.
    The PIRC Letter opposed the proposed rule change on the basis that 
it might inhibit investor choice and control over the mediation 
process. The letter stated that, under the current rule, an investor 
has the ability to select a mediator best suited to represent him or 
her in his or her specific claim. The letter further stated that this 
level of choice provides an investor a level of control over the 
process and increases the perception of its fairness. In particular, 
the letter stated that under the current rule, an investor could choose 
lower-cost options that suit the investor's financial status, such as a 
non-FINRA pro bono mediator, or a mediator who is willing to accept a 
reduced fee. The letter expressed concern that the proposed rule would 
increase the overall cost of mediation to investors because it would 
inhibit their ability to choose affordable non-FINRA mediators. In its 
Response Letter, FINRA stated that it has a duty to ensure the quality 
of its program and believes that maintaining control of its mediator 
roster is necessary to meet this duty. Moreover, the letter reiterated 
that parties would still have options for mediating their dispute if 
the Mediation Director rejected their selected mediator: The parties 
would be able to select a mediator on FINRA's roster, select a 
different non-FINRA mediator subject to the same conditions as the 
rejected mediator, or choose to mediate their dispute in another forum.
    In its Response Letter, FINRA also stated that it believes its 
mediation program is cost-effective for investors of all means. FINRA 
stated it believes that its filing fees (of up to $300) are modest and 
that the Mediation Director has discretion to waive them. FINRA also 
stated that it offers many opportunities for parties using its 
mediators to reduce the cost of mediation, including: (1) When FINRA 
adds mediators to its roster, it asks them to reduce their rates for 
smaller claims; (2) FINRA's Mediation Administrators provide, upon 
request, parties with a list of mediators who have agreed to conduct 
mediations for $50 per hour in appropriate cases; (3) some mediators on 
FINRA's roster have agreed to conduct mediations on a pro bono basis 
for parties of limited means; and (4) every October, FINRA hosts 
Mediation Settlement Month during which both FINRA and the mediators on 
its roster lower their fees in order to encourage participation.\13\
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    \13\ FINRA lowers its filing fees by 50 percent and its 
mediators (who typically charge between $250 and $500 per hour for 
services rendered) reduce their rates to $200 per hour for a four-
hour mediation session for claims up to $25,000, and $400 per hour 
for claims up to $100,000.
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    The Potter Letter stated, among other things, that FINRA has not 
established a need for the proposed rule change. The letter also stated 
that the proposed rule change would prevent parties from selecting a 
mediator of their choice and would restrict their freedom to contract. 
Moreover, the letter stated that the commenter believes the proposed 
rule would be difficult to enforce because FINRA would be unable to 
monitor a prohibition against private parties entering into private 
contracts.
    In its Response Letter, FINRA stated that it does not believe the 
proposed rule change was unnecessary and reiterated that FINRA has a 
duty to ensure the quality of its mediation program, and that 
maintaining control of its mediator roster is a necessary to meet this 
duty. With respect to the letter's other objections, FINRA stated that 
it believes the commenter misinterpreted the proposal. Specifically, 
FINRA stated that mediation is voluntary, and that the proposed rule 
change would not prohibit parties from choosing their own mediators, or 
from choosing their own forum for mediation. In addition, FINRA 
reiterated that if the Mediation Director rejects a mediator selected 
by the parties, they would still be free to mediate their dispute 
elsewhere. Moreover, FINRA stated that it does not intend to police 
mediation between parties that occurs outside of FINRA's mediation 
forum.
    For the aforementioned reasons, FINRA declined to amend the 
proposed rule change as suggested by commenters.

IV. Commission's Findings

    The Commission has carefully reviewed the proposed rule change, the 
comments received, and FINRA's Response Letter. Based on its 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. In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 15A(b)(6) of the Act,\14\ 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.
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    \14\ 15 U.S.C. 78o-3(b)(6).
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    More specifically, the Commission finds that the proposed rule 
change to provide the Mediation Director with discretion to determine 
whether parties to a FINRA mediation may select a mediator who is not 
on FINRA's mediator roster would benefit investors and other 
participants in the forum by helping to protect the quality and 
integrity of FINRA's mediation program for parties using FINRA's forum. 
While the Commission appreciates the commenters' concerns, particularly 
regarding whether parties using the forum would understand the options 
available to them if the Mediation Director rejects a mediator selected 
by the parties, we believe that FINRA has responded adequately to the 
commenters' concerns and note that FINRA has stated that it will 
include in a Regulatory Notice announcing approval of the proposed rule 
change language designed to ensure that parties are cognizant of their 
options under FINRA's program, and that if the Mediation Director 
rejects the parties' chosen mediator, FINRA will notify the parties of 
the alternatives available to them.
    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.\15\
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    \15\ See 15 U.S.C. 78c(f).
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    For the reasons stated above, the Commission finds that the 
proposed rule change is consistent with the Act and the rules and 
regulations thereunder.

[[Page 31680]]

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-FINRA-2012-011) be, and it 
hereby is, approved.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-12850 Filed 5-25-12; 8:45 am]
BILLING CODE 8011-01-P