[Federal Register Volume 78, Number 69 (Wednesday, April 10, 2013)]
[Notices]
[Pages 21449-21452]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-08323]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69297; File No. SR-FINRA-2013-003]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change To Amend the
Customer and Industry Codes of Arbitration Procedure To Revise the
Public Arbitrator Definition
April 4, 2013.
I. Introduction
On January 4, 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
[[Page 21450]]
of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\
a proposed rule change to amend FINRA's Customer and Industry Codes of
Arbitration Procedure (collectively, the ``Codes'') to revise the
definition of ``public arbitrator'' in the Codes. Specifically, the
proposed rule change would (a) exclude persons associated with a mutual
fund or hedge fund from serving as public arbitrators and (b) require
individuals to wait for two years after ending certain affiliations
before they may be permitted to serve as public arbitrators. The
proposed rule change was published for comment in the Federal Register
on January 17, 2013.\3\ The Commission received 45 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. 68632 (Jan. 11, 2013), 78 FR
3925 (Jan. 17, 2013) (``Notice''). The comment period closed on
February 7, 2013.
\4\ See Letter from Steven B. Caruso, Maddox Hargett & Caruso,
dated Jan. 16, 2013 (``Caruso Letter''); letter from David Neuman,
Stoltmann Law Offices, dated Jan. 16, 2013 (``Neuman Letter'');
letter from Richard M. Layne, Law Office of Richard M. Layne, dated
Jan. 28, 2013 (``Layne Letter''); letter from Seth E. Lipner,
Professor of Law, Zickloin School of Business, Baruch College, and
Member, Deutsch & Lipner, dated Jan. 29, 2013 (``Lipner Letter'');
letter from Carl J. Carlson, Tousley Brain Stephens, dated Jan. 29,
2013 (``Carlson Letter''); letter from David Harrison, Law Offices
of David Harrison, dated Jan. 29, 2013 (``Harrison Letter''); letter
from Philip M. Aidikoff, dated Jan. 29, 2013 (``Aidikoff Letter'');
letter from Scott L. Silver, Silver Law Group, dated Jan. 30, 2013
(``Silver Letter''); letter from Robert A. Uhl, Adjunct Professor of
Law, Securities Arbitration and Director, Pepperdine Investor
Advocacy Clinic, and Partner, Aidikoff, Uhl & Bakhtiari, dated Jan.
30, 2013 (``Uhl Letter''); letter from Andrew A. Lipkowitz, Student
Intern, and Christine Lazaro, Acting Director, St. John's University
School of Law Securities Arbitration Clinic, dated Feb. 4, 2013
(``St. John's Letter''); letter from Robert C. Port, Cohen Goldstein
Port & Gottlieb, dated Feb. 5, 2013 (``Port Letter''); letter from
Lisa A. Catalano, dated Feb. 5, 2013 (``Catalano Letter''); letter
from Scott R. Shewan, Pape & Shewan, dated Feb. 6, 2013 (``Shewan
Letter''); letter from Jon C. Furgison, Law Offices of Jon C.
Furgison, dated Feb. 6, 2013 (``Furgison Letter''); letter from
Steven J. Gard, Reznicsek Fraser White & Shaffer, dated Feb. 6, 2013
(``Gard Letter''); letter from Jonathan W. Evans and Michael S.
Edmiston, Jonathan W. Evans & Associates, dated Feb. 6, 2013
(``Evans and Edmiston Letter''); letter from Robert Savage, Visiting
Assistant Clinical Professor, Florida International University
College of Law, dated Feb. 7, 2013 (``Savage Letter I''); letter
from Robert Savage dated Feb. 7, 2013 (``Savage Letter II''); letter
from James A. Dunlap, Jr., James A. Dunlap Jr. & Associates, dated
Feb. 7, 2013 (``Dunlap Letter''); letter from Diane Nygaard, Kenner,
Schmitt & Nygaard, dated Feb. 7, 2013 (``Nygaard Letter''); letter
from W. Scott Greco, Greco & Greco, dated Feb. 7, 2013 (``Greco
Letter''); letter from A. Heath Abshure, NASAA President and
Arkansas Securities Commissioner, dated Feb. 7, 2013 (``NASAA
Letter''); letter from Robert S. Banks, Jr., Banks Law Office, dated
Feb. 7, 2013 (``Banks Letter''); letter from Dale Ledbetter, Esq.,
Ledbetter and Associates, dated Feb. 7, 2013 (``Ledbetter Letter'');
letter from Scott C. Ilgenfritz, President, Public Investors
Arbitration Bar Association, dated Feb. 7, 2013 (``PIABA Letter'');
letter from Elizabeth Zeck, Willoughby & Hoefer, dated Feb. 7, 2013
(``Zeck Letter''); letter from James A. Sigler, dated Feb. 7, 2013
(``Sigler Letter''); letter from Robert W. Goehring, dated Feb. 7,
2013 (``Goehring Letter''); letter from William S. Shepherd,
Shepherd Smith Edwards & Kantas, dated Feb. 7, 2013 (``Shepherd
Letter''); letter from Leonard Steiner, Beverly Hills, California,
dated Feb. 7, 2013 (``Steiner Letter''); letter from Joseph Fogel,
Fogel & Associates, dated Feb. 7, 2013 (``Fogel Letter''); letter
from Richard A. Lewins, dated Feb. 7, 2013 (``Lewins Letter'');
letter from Jenice L. Malecki, Malecki Law, dated Feb. 7, 2013
(``Malecki Letter''); letter from Mark E. Sanders, Halling & Cayo,
dated Feb. 7, 2013 (``Sanders Letter''); letter from Jeffrey Sonn,
Sonn & Erez, dated Feb. 7, 2013 (``Sonn Letter''); letter from
Thomas C. Costello, dated Feb. 7, 2013 (``Costello Letter''); letter
from Barry D. Estell, dated Feb. 7, 2013 (``Estell Letter''); letter
from Royal Lea, dated Feb. 7, 2013 (``Lea Letter''); letter from
Peter Mougey, Levin, Papantonio, Thomas, Mitchell, Rafferty &
Proctor, dated Feb. 7, 2013 (``Mougey Letter''); letter from William
A. Jacobson, Associate Clinical Professor, Cornell Law School, and
Director, Cornell Securities Law Clinic, and Malavika Rao, Cornell
Law School `14, dated Feb. 7, 2013 (``Cornell Letter''); letter from
David T. Bellaire, Executive Vice President and General Counsel,
Financial Services Institute, dated Feb. 7, 2013 (``FSI Letter'');
letter from Theodore M. Davis, dated Feb. 8, 2013 (``Davis
Letter''); letter from Nicholas J. Guiliano, dated Feb. 8, 2013
(``Guiliano Letter''); letter from Mitchell Ostwald, dated Feb. 8,
2013 (``Ostwald Letter''); letter from Charles Michael Tobin, The
Tobin Law Firm, dated Feb 22, 2013 (``Tobin 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 Mar. 11, 2013 (``Response Letter''). The text of
the proposed rule change and a copy of 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. A copy 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 classifies arbitrators under the
Codes as either ``non-public'' (otherwise known as ``industry''
arbitrators) or ``public.'' Arbitrators are generally considered non-
public if they are affiliated with the securities industry either
because they (1) are currently or were formerly employed in a
securities business; or (2) provide professional services to securities
businesses. Arbitrators are generally considered public if they (1) do
not have any significant affiliation with the securities industry; and
(2) are not 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 amount of time
necessary after leaving the securities industry to transition from a
non-public to public arbitrator;
Clarify that ``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 definition of ``public arbitrator''
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 (``Ten-Percent
Rule''); 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.\6\ In 2007, FINRA again revised the
definition of ``public arbitrator'' to:
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\6\ 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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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.
Exclude individuals with a spouse or immediate family
member who was employed by, or who served as an officer or director of,
a company in a control relationship with a broker-dealer; and
Clarify 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).\7\
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\7\ 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 Ten-Percent Rule. The amended definition was
designed to preclude 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
[[Page 21451]]
disputes concerning an investment account or transaction.\8\
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\8\ 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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The proposed rule change is designed to improve investor confidence
in the neutrality of FINRA's public arbitrator roster. In particular,
the proposed rule change would (a) exclude persons associated with a
mutual fund or hedge fund from serving as public arbitrators and (b)
require individuals to wait for two years after ending certain
affiliations before they may be permitted to serve as public
arbitrators.
FINRA has indicated that it would announce the effective date of
the proposed rule change in a Regulatory Notice to be published no
later than 60 days following Commission approval, and that the
effective date would be no later than 30 days following publication of
the Regulatory Notice announcing Commission approval.
III. Discussion of Comment Letters
As stated above, the Commission received 45 comment letters on the
proposed rule change in response to the Notice. Thirty-eight of those
commenters (represented by 39 comment letters) generally supported
FINRA's proposal to revise the definition of ``public arbitrator'' to
exclude persons associated with a mutual fund or hedge fund from
serving as public arbitrators.\9\ Of those commenters, however, many
stated that while they agreed with the proposed rule change, they
thought FINRA should exclude additional categories of persons from the
definition of ``public arbitrator.'' Moreover, some otherwise
supportive commenters thought that FINRA should lengthen the proposed
cooling off period.
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\9\ See Caruso Letter; Neuman Letter; Layne Letter; Lipner
Letter; Carlson Letter; Aidikoff Letter; Silver Letter; Uhl Letter;
St. John's Letter; Port Letter; Catalano Letter; Shewan Letter;
Furgison Letter; Evans and Edmiston Letter; Savage Letter I; Savage
Letter II; Dunlap Letter; Nygaard Letter; Greco Letter; NASAA
Letter; Banks Letter; Ledbetter Letter; PIABA Letter; Zeck Letter;
Sigler Letter; Goehring Letter; Shepherd Letter; Fogel Letter;
Lewins Letter; Malecki Letter; Sanders Letter; Sonn Letter; Costello
Letter; Estell Letter; Cornell Letter; Davis Letter; Guiliano
Letter; Ostwald Letter; Tobin Letter.
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A. Exclusions
Three commenters suggested that the definition of ``public
arbitrator'' should be further narrowed to expressly exclude from ever
acting as a public arbitrator persons associated with issuers or
sponsors of private placements, publicly offered non-traded REITs,
variable insurance products, and other investment products.\10\ These
commenters also suggested that the definition of ``public arbitrator''
should exclude persons who have ever worked for more than a de minimis
time as a stockbroker or investment advisor, as well as persons with
more than a de minimis time of affiliation with a FINRA member firm, an
investment advisory firm, a hedge fund, a mutual fund, or an issuer,
sponsor, marketer, or seller of securities or investment products with
embedded securities.\11\ Similarly, two commenters suggested that
anyone who has been licensed to do business in the securities industry
or depended on the industry for more than a de minimis amount of his or
her livelihood for any appreciable length of time should be excluded
from the definition of ``public arbitrator.'' \12\
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\10\ See PIABA Letter; Sanders Letter; Cornell Letter.
\11\ Id.
\12\ See Lewins Letter; Cornell Letter.
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One commenter suggested that the definition of ``public
arbitrator'' should exclude any attorney whose firm has derived $50,000
or ten percent or more of its annual revenue in the prior two years
from professional services rendered to claimants in customer disputes
concerning an investment account or transaction.\13\ Another commenter
suggested that individuals who have been employed by securities
industry trade organizations such as FINRA should be barred from being
classified as public arbitrators.\14\
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\13\ See FSI Letter.
\14\ See Davis Letter.
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One commenter generally approved of the proposed rule change but
maintained that, in the context of customer disputes, FINRA's current
definition of ``non-public arbitrator'' must be broadened to include
the entire securities industry, particularly if FINRA plans to open up
its forum to non-members.\15\
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\15\ See NASAA Letter.
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Finally, another commenter believed the proposed rule change should
exclude additional categories of individuals from the definition of
``public arbitrator'' but ultimately disapproved of the proposed rule
change on the grounds that it would continue to permit individuals who
previously worked in and have financial interests connected to the
securities industry to be classified as public arbitrators.\16\ This
commenter also expressed the view that the amended rule would continue
to give FINRA staff too much discretion in classifying arbitrators.
Another commenter expressed the same concern.\17\
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\16\ See Gard Letter.
\17\ See Gard Letter; Estell Letter.
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B. Cooling-Off Period
Fourteen commenters suggested that FINRA's proposal to require
individuals to wait for two years after ending certain affiliations
before they may be permitted to serve as public arbitrators should be
amended to increase the proposed ``cooling off'' period from two years
to at least five years.\18\ Five commenters suggested that the proposed
cooling off period should generally be longer than two years.\19\ Three
commenters generally disapproved of the length of the proposed two-year
cooling off period on the grounds that it would not serve the interests
of investors.\20\ Two commenters suggested expanding the proposed
cooling off period from two years to ten.\21\ One commenter suggested
that no individual who has spent ten years or more in the securities
industry should ever be classified as a public arbitrator.\22\ Another
commenter suggested that anyone associated with the industry for twenty
or more years should be prohibited from ever becoming a public
arbitrator.\23\ Eleven commenters suggested that no cooling off period
is sufficient and that only individuals who have never had an
affiliation with the financial services industry should be eligible to
serve as public arbitrators.\24\
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\18\ See Caruso Letter; Neuman Letter; Layne Letter; Harrison
Letter; Silver Letter; St. John's Letter; Catalano Letter; Zeck
Letter; Shepherd Letter; Malecki Letter; Costello Letter; Estell
Letter; Cornell Letter; Guiliano Letter.
\19\ See Greco Letter; PIABA Letter; Fogel Letter; Lewins
Letter; Sanders Letter.
\20\ See Dunlap Letter; Nygaard Letter; Goehring Letter.
\21\ See Carlson Letter; Evans and Edmiston Letter.
\22\ See Uhl Letter.
\23\ See Harrison Letter.
\24\ See Lipner Letter; Aidikoff Letter; Silver Letter; Port
Letter; Shewan Letter; Furgison Letter; Evans and Edmiston Letter;
NASAA Letter; Sonn Letter; Davis Letter; Ostwald Letter.
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In its Response Letter, FINRA stated that the purpose of the
proposed rule change is to respond to investor representatives'
concerns that certain arbitrators on the public roster were not
perceived as public because of their background and experience.
Specifically, FINRA stated that the proposed rule change would affect
certain persons whose job precludes them from being classified as a
public arbitrator but does not qualify them as a non-public arbitrator.
In addition, FINRA stated that the proposed rule would require persons
precluded by their job from being classified as a public arbitrator to
wait two years
[[Page 21452]]
before being eligible to join the public roster after moving to a job
that would not otherwise disqualify them for service. FINRA maintained
that the proposed two-year cooling off period responds to the concerns
raised by investor representatives and would be a positive step toward
enhancing investors' perception of fairness in FINRA's arbitration
forum. FINRA also stated that it intends to further review, under the
auspices of the National Arbitration and Mediation Committee, both the
public and non-public arbitrator definitions with a view towards
clarifying the definitions and reviewing additional issues such as
those raised in comment letters on the proposed rule change. Therefore,
FINRA declined to amend the proposed rule change.
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 of
the record, 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.\25\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Act,\26\ 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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\25\ In approving this proposed rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\26\ 15 U.S.C. 78o-3(b)(6).
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More specifically, the Commission finds that the proposed rule
change to exclude persons associated with a mutual fund or hedge fund
from serving as public arbitrators and require individuals to wait for
two years after ending certain affiliations before they may be
permitted to serve as public arbitrators would benefit investors and
other participants in the forum by improving investor confidence in the
neutrality of FINRA's public arbitrator roster. While the Commission
appreciates the suggestions regarding exclusions from the definition of
``public arbitrator'' and the proposed two-year cooling off period, we
believe that FINRA has responded adequately to comments. We also agree
with the Response Letter's position that the proposed rule change
should improve investors' perception about the fairness and neutrality
of FINRA's public arbitrator roster, particularly given the Response
Letter's representation that FINRA intends to conduct a comprehensive
review of both the public and non-public arbitrator definitions with a
view towards further clarifying the definitions and reviewing
additional issues such as those raised in comment letters on the
proposed rule change.
For the reasons stated above, the Commission finds that the
proposed rule change is consistent with the Act and the rules and
regulations thereunder.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\27\ that the proposed rule change (SR-FINRA-2013-003) be, and it
hereby is, approved.
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\27\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08323 Filed 4-9-13; 8:45 am]
BILLING CODE 8011-01-P