[Federal Register Volume 78, Number 12 (Thursday, January 17, 2013)]
[Notices]
[Pages 3925-3928]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-00874]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68632; File No. SR-FINRA-2013-003]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to
Amendments to the Customer and Industry Codes of Arbitration Procedure
To Revise the Public Arbitrator Definition
January 11, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on January 4, 2013, Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``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
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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 Customer and Industry Codes of
Arbitration Procedure (``Codes'') to revise the definition of ``public
arbitrator'' to exclude persons associated with a mutual fund or hedge
fund from serving as public arbitrators and to require individuals to
wait for two years after ending certain affiliations before they may be
permitted to serve as public arbitrators. FINRA believes that the
proposed amendments to the public arbitrator definition would improve
investors' perception about the fairness and neutrality of FINRA's
public arbitrator roster.
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
FINRA classifies arbitrators under the Codes as either ``non-
public'' or ``public'' (non-public arbitrators are often referred to as
``industry'' arbitrators). Non-public arbitrators are affiliated with
the securities industry either through their current or former
employment in a securities business, or because they provide
professional services to securities businesses. Public arbitrators do
not have any significant affiliation with the securities industry; nor
are they related to anyone with a significant affiliation with the
securities industry.
To improve investor confidence in the neutrality of FINRA's public
arbitrator roster, FINRA has amended its arbitrator definitions a
number of times over the years.
In 2004, FINRA amended the definitions of public arbitrator and
non-public arbitrator to:
Increase from three years to five years the period for
transitioning from a non-public to public arbitrator after leaving the
securities industry;
Clarify that the term ``retired'' from the industry
includes anyone who spent a substantial part of his or her career in
the industry;
Prohibit anyone who has been associated with the industry
for at least twenty years from ever becoming a public arbitrator,
regardless of how long ago the association ended;
Exclude from the public arbitrator roster attorneys,
accountants, or other professionals whose firms have derived ten
percent or more of their annual revenue in the previous two years from
clients involved in securities-related activities; and
Provide that investment advisers may not serve as public
arbitrators, and may only serve as non-public arbitrators if they
otherwise qualify as non-public.\3\
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\3\ See Exchange Act Rel. No. 49573 (April 16, 2004), 69 FR
21871 (Apr. 22, 2004) (File No. SR-NASD-2003-95) (Order Granting
Approval to a Proposed Rule Change Relating to Arbitrator
Classification and Disclosure in NASD Arbitrations). The changes
were announced in Notice to Members 04-49 (June 2004).
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In 2007, FINRA revised the public arbitrator definition to exclude
individuals who were employed by, or who served as an officer or
director of, a company in a control relationship with a broker-dealer.
Individuals were also excluded if a spouse or immediate family member
served in such a capacity. In this rule change, FINRA also made it
clear that people registered through a broker-dealer could not be
public arbitrators even if they are employed by a non-broker-dealer
(such as a bank).\4\
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\4\ See Act Rel. No. 54607 (Oct. 16, 2006), 71 FR 62026 (Oct.
20, 2006) (File No. SR-NASD-2005-094)(Order Approving Proposed Rule
Change and Amendment No. 1 Thereto Relating to Amendments to the
Classification of Arbitrators Pursuant to Rule 10308 of the NASD
Code of Arbitration Procedure). The changes were announced in Notice
to Members 06-64 (Nov. 2006).
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Finally, in 2008, FINRA revised the public arbitrator definition to
add a dollar limit to the 2004 ten-percent rule. This precluded an
attorney, accountant, or other professional from serving as a public
arbitrator if the individual's firm derived $50,000 or more in annual
revenue in the past two years from professional services rendered to
certain industry entities relating to customer disputes concerning an
investment account or transaction.\5\
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\5\ See Exchange Act Rel. No. 57492 (Mar. 13, 2008), 73 FR 15025
(Mar. 20, 2008) (File No. SR-NASD-2007-021) (Order Approving
Proposed Rule Change To Amend the Definition of Public Arbitrator).
The changes were announced in Regulatory Notice 08-22 (May 2008).
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Proposal To Amend the Arbitrator Definition
Recently, FINRA investor representatives raised concerns that they
do not perceive certain arbitrators on the public roster as public
because of their background or experience. To respond to this
perception, FINRA is proposing to amend the public arbitrator
definition to exclude persons associated with a mutual fund or hedge
fund from serving as public arbitrators and to require individuals to
wait for two years after ending certain affiliations before FINRA
permits them to serve as public arbitrators.
The public arbitrator definition does not expressly prohibit
individuals associated with mutual funds and hedge funds from serving
as public arbitrators. However, because of their association with the
financial services industry, FINRA believes that these individuals
should not serve as public arbitrators. Therefore, FINRA's current
practice is to exclude these individuals from the public arbitrator
roster until they terminate their affiliation with the hedge fund or
mutual fund. For example, FINRA removed a public arbitrator from the
roster because he was serving as a director of a mutual fund. FINRA is
proposing to amend Rules 12100(u)(3) and 13100(u)(3), which exclude
investment advisers from serving as public arbitrators, to exclude also
persons associated with, including registered through, a mutual fund or
hedge fund. The proposed rule change would respond to questions and
concerns raised about arbitrator service by persons associated with
mutual funds and hedge funds.
FINRA is also proposing to amend the public arbitrator definition
to add a two-year ``cooling off'' period before FINRA permits certain
individuals to serve as public arbitrators. Currently under the Codes,
an individual may not serve as a public arbitrator if he or she is:
An investment adviser;
An attorney, accountant, or other professional whose firm
derived ten percent or more of its annual revenue in the past two years
from certain financial industry entities;
An attorney, accountant, or other professional whose firm
derived $50,000 or more in annual revenue in the past two years from
professional
[[Page 3927]]
services rendered to certain financial industry entities relating to
any customer disputes concerning an investment account or transaction;
Employed by, or is the spouse or an immediate family
member of a person who is employed by, an entity that directly or
indirectly controls, is controlled by, or is under common control with,
any partnership, corporation, or other organization that is engaged in
the securities business; or
A director or officer of, or is the spouse or an immediate
family member of a person who is a director or officer of, an entity
that directly or indirectly controls, is controlled by, or is under
common control with, any partnership, corporation, or other
organization that is engaged in the securities business.
However, as soon as the individual ends the affiliation that was
the basis for the exclusion from the public roster, the individual may
begin serving as a public arbitrator. In one instance, an individual
applying to be a public arbitrator had retired one month earlier from a
lengthy career at a law firm that represented securities industry
clients. Currently, Rule 12100(u)(5) provides that a public arbitrator
may not be an attorney, accountant, or other professional whose firm
derived $50,000 or more in annual revenue in the past two years from
professional services rendered to specified securities industry clients
relating to any customer disputes concerning an investment account or
transaction. The applicant confirmed that the firm derived revenue of
at least $50,000 during the past two years from clients in the
securities industry relating to customer disputes. If the individual
applied while employed at the firm, FINRA would not have approved the
application. However, since the applicant left the firm one month
earlier, and the rule does not include a cooling off period, the
applicant was permitted to join the public arbitrator roster.
FINRA is proposing to amend Rules 12100(u) and 13100(u) to provide
that a person whom FINRA would not designate as a public arbitrator
because of an affiliation under subparagraphs (3)-(7) (the exclusions
detailed in the bullets above) shall not be designated as a public
arbitrator for two calendar years after ending the affiliation. As
stated above, FINRA is also proposing to add persons associated with
mutual funds and hedge funds to Rules 12100(u)(3) and 13100(u)(3).
Therefore, the two-year cooling off period would apply to these
individuals as well. FINRA believes that the cooling off period would
improve its constituents' perception about the neutrality of the
arbitrators on the public roster.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Exchange Act,\6\ 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 the proposed amendments to
the public arbitrator definition would benefit investors by addressing
concerns raised about the fairness and neutrality of FINRA's public
arbitrator roster. FINRA believes that by prohibiting persons
associated with mutual funds or hedge funds from serving on the public
roster, the proposed amendments further restrict the professional
affiliations that a public arbitrator may have with the securities
industry. The proposed two-year cooling off period seeks to ensure that
potential arbitrators have sufficient separation from their
affiliations with the securities industry. FINRA believes these
restrictions would improve investors' perception of fairness and
neutrality of the public roster.
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\6\ 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 Exchange 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 Exchange 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 [email protected]. Please include
File Number SR-FINRA-2013-003 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-2013-003. 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
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-2013-003 and should be
submitted on or before February 7, 2013.
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00874 Filed 1-16-13; 8:45 am]
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