[Federal Register Volume 80, Number 42 (Wednesday, March 4, 2015)]
[Notices]
[Pages 11695-11706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-04419]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74383; File No. SR-FINRA-2014-028]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change Relating to
Revisions to the Definitions of Non-Public Arbitrator and Public
Arbitrator
February 26, 2015.
I. Introduction
On June 17, 2014, 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 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend FINRA Rule 12100(p) of the Code of
Arbitration Procedure for Customer Disputes (``Customer Code'') and
FINRA Rule 13100(p) of the Code of Arbitration Procedure for Industry
Disputes (``Industry Code'') (collectively, ``Codes''), defining the
term ``non-public arbitrator;'' and FINRA Rule 12100(u) of the Customer
Code and Rule 13100(u) of the Industry Code, defining the term ``public
arbitrator.''
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on July 3, 2014.\3\ On August 4, 2014, FINRA extended the time
period in which the Commission must approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to approve or disapprove the proposed rule change to
October 1, 2014. The Commission received three hundred sixteen (316)
comment letters in response to the Notice of Filing.\4\ On September
30, 2014, the Commission received a letter from FINRA responding to the
comment letters.\5\ On October 1, 2014, the Commission issued an order
to institute proceedings pursuant to section 19(b)(2)(B) of the Act \6\
to determine whether to approve or disapprove the proposed rule change.
The order was published for comment in the Federal Register on October
7, 2014.\7\ The Commission received fourteen (14) comment letters in
response to the Proceedings Order.\8\ On
[[Page 11696]]
November 24, 2014, the Commission received a letter from FINRA
responding to the comment letters.\9\ On December 11, 2014, the
Commission received a letter from FINRA supplementing the FINRA
November Letter.\10\
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\3\ Exchange Act Release No. 72491 (Jun. 27, 2014), 79 FR 38080
(Jul. 3, 2014) (Notice of Filing of Proposed Rule Change Relating to
Revisions to the Definitions of Non-Public Arbitrator and Public
Arbitrator) (``Notice of Filing''). The comment period closed on
July 24, 2014.
\4\ Of the 316 letters, 21 were unique letters, and 295 of the
letters followed a form designated as the ``Type A'' letter,
submitted by self-identified independent financial advisors
(``independent financial advisors'') (``Type A Letter''). The unique
letters were submitted by: Philip M. Aidikoff, Aidikoff, Uhl &
Bakhtiari, dated July 1, 2014 (``Aidikoff Letter''); Steven B.
Caruso, Esq., Maddox Hargett & Caruso, P.C., dated July 1, 2014
(``Caruso July Letter''); Ryan K. Bakhtiari, Aidikoff, Uhl &
Bakhtiari, dated July 2, 2014 (``Bakhtiari July Letter''); Richard
A. Stephens, Attorney at Law, dated July 6, 2014 (``Stephens
Letter''); Daniel E. Bacine, Barrack, Rodos & Bacine, dated July 18,
2014 (``Bacine Letter''); Blossom Nicinski, dated July 20, 2014
(``Nicinski Letter''); Christopher L. Mass, dated July 21, 2014
(``Mass Letter''); Glenn S. Gitomer, McCausland Keen and Buckman,
dated July 23, 2014 (``Gitomer July Letter''); David T. Bellaire,
Esq., Executive Vice President & General Counsel, Financial Services
Institute, dated July 24, 2014 (``FSI Letter''); Thomas J. Berthel,
CEO, Berthel Fisher & Company, dated July 24, 2014 (``Berthel
Letter''); Kevin M. Carroll, Managing Director and Associate General
Counsel, Securities Industry and Financial Markets Association,
dated July 24, 2014 (``SIFMA July Letter''); CJ Croll, Student
Intern, Elissa Germaine, Supervising Attorney, and Jill I. Gross,
Director, Investor Rights Clinic at Pace Law School, dated July 24,
2014 (``PIRC July Letter''); Jason Doss, President, Public Investors
Arbitration Bar Association, dated July 24, 2014 (``PIABA Letter'');
George H. Friedman, Esq., George H. Friedman Consulting, LLC, dated
July 24, 2014 (``Friedman July Letter''); Gary N. Hardiman, dated
July 24,2014 (``Hardiman Letter''); J. Burton LeBlanc, President,
American Association for Justice, dated July 24, 2014 (``AAJ
Letter''); Richard P. Ryder, Esq., President, Securities Arbitration
Commentator, Inc., dated July 24, 2014 (``SAC July Letter''); Andrea
Seidt, President, North American Securities Administrators
Association, and Ohio Securities Commissioner, dated July 24, 2014
(``NASAA July Letter''); Robert Getman, dated July 28, 2014
(``Getman Letter''); Barry D. Estell, Attorney at Law (retired),
dated August 13, 2014 (``Estell Letter''); and Walter N. Vernon III,
Esq., dated August 21, 2014 (``Vernon Letter''). Comment letters are
available at www.sec.gov.
The Commission discussed these comments in the Proceedings
Order. See infra note 7.
\5\ Letter from Margo A. Hassan, Assistant Chief Counsel, FINRA
Dispute Resolution, to Brent J. Fields, Secretary, SEC, dated
September 30, 2014 (``FINRA September Letter''). The FINRA September
Letter is available at www.sec.gov.
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ Exchange Act Release No. 73277 (Oct. 1, 2014), 79 FR 60556
(Oct. 7, 2014) (Order Instituting Proceedings To Determine Whether
To Approve or Disapprove Proposed Rule Change Relating to Revisions
to the Definitions of Non-Public Arbitrator and Public Arbitrator)
(``Proceedings Order''). The comment period closed on November 6,
2014.
\8\ The comment letters were submitted by: John A. Bender, Esq.,
Member, Ryan Swanson Cleveland, dated October 10, 2014 (``Bender
Letter''); George H. Friedman, Esquire, George H. Friedman
Consulting, LLC, dated October 20, 2014 (``Friedman October
Letter''); Richard P. Ryder, Esq., President, Securities Arbitration
Commentator, Inc., dated October 26, 2014 (``SAC October Letter'');
Steven B. Caruso, Esq., Maddox Hargett & Caruso, P.C., dated October
29, 2014 (``Caruso October Letter''); Ryan K. Bakhtiari, Aidikoff,
Uhl & Bakhtiari, dated October 30, 2014 (``Bakhtiari October
Letter''); Glenn S. Gitomer, McCausland Keen and Buckman, dated
November 5, 2014 (``Gitomer November Letter''); William Beatty,
President, North American Securities Administrators Association and
Washington Securities Administrator, dated November 6, 2014 (``NASAA
November Letter''); Kevin M. Carroll, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association, dated November 6, 2014 (``SIFMA November Letter'');
Ryan Corbin, Kori Eskridge, and Kristina Ludwig, Student Interns,
and Nicole Iannarone, Assistant Clinical Professor, Georgia State
University College of Law Investor Advocacy Clinic, dated November
6, 2014 (``GSU Letter''); CJ Croll and Jeffrey Valacer, Student
Interns, Elissa Germaine, Supervising Attorney, and Jill I. Gross,
Director, Investor Rights Clinic at Pace Law School, dated November
6, 2014 (``PIRC First November Letter''); Greg Curley, Senior
Litigation Counsel, American International Group, Inc., AIG Advisor
Group, Inc., dated November 6, 2014 (``AIG Letter''); William A.
Jacobson, Esq., Clinical Professor of Law and Director, and Nathan
F. Baum, Student, Cornell University Law School Securities Law
Clinic, dated November 6, 2014 (``CSLC Letter''); Daniel Wolfe,
Legal Intern, and Teresa Verges, Director, University of Miami
Investor Rights Clinic, dated November 6, 2014 (``UMIRC Letter'');
and CJ Croll and Jeffrey Valacer, Student Interns, Elissa Germaine,
Supervising Attorney, and Jill I. Gross, Director, Investor Rights
Clinic at Pace Law School, dated November 21, 2014 (``PIRC Second
November Letter''). Comment letters are available at www.sec.gov.
\9\ Letter from Margo A. Hassan, Assistant Chief Counsel, FINRA
Dispute Resolution, to Brent J. Fields, Secretary, SEC, dated
November 24, 2014 (``FINRA November Letter''). The FINRA November
Letter is available at www.sec.gov.
\10\ Letter from Margo A. Hassan, Assistant Chief Counsel, FINRA
Dispute Resolution, to Brent J. Fields, Secretary, SEC, dated
December 11, 2014 (``FINRA December Letter''). The FINRA December
Letter is available at www.sec.gov.
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This order approves the proposed rule change.
II. Description of the Proposed Rule Change
In general, FINRA classifies arbitrators as ``non-public'' or
``public'' based on their professional and personal affiliations.
Currently, FINRA Rule 12100(p) of the Customer Code and FINRA Rule
13100(p) of the Industry Code (defining the term ``non-public
arbitrator'') list financial industry affiliations that might qualify a
person to serve as a non-public arbitrator in the FINRA arbitration
forum. Conversely, FINRA Rule 12100(u) of the Customer Code and FINRA
Rule 13100(u) of the Industry Code (defining the term ``public
arbitrator'') list affiliations that disqualify a person from serving
as a public arbitrator in the FINRA arbitration forum. FINRA is
proposing to delete the definitions in their entirety, and replace them
with new definitions. The proposed amendments are described below.
A. Non-Public Arbitrator Definition
1. Proposed New Rule 12100(p)(1) \11\
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\11\ Where this order refers only to rules in the Customer Code,
the changes and discussions also apply to the corresponding rules in
the Industry Code.
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Under the current non-public arbitrator definition, if a person is
currently, or was within the past five years, affiliated with a
financial industry entity specified in the rule (a ``specified
financial industry entity''), the person is classified as a non-public
arbitrator.\12\ The rule permits these individuals to be reclassified
as public arbitrators five years after ending all financial industry
affiliations unless (i) they retired from, or spent a substantial part
of their career with, a specified financial industry entity \13\ or
(ii) they were affiliated for 20 years or more with a specified
financial industry entity.\14\ The individuals subject to these
exceptions remain classified as non-public arbitrators.
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\12\ See current Rule 12100(p)(1). This provision applies to a
person who is, or was within the past five years: (1) Associated
with, including registered through, a broker or dealer (including a
government securities broker or dealer or a municipal securities
dealer); (2) registered under the Commodities Exchange Act; (3) a
member of a commodities exchange or a registered futures
association; or (4) associated with a person or firm registered
under the Commodities Exchange Act.
\13\ See current Rule 12100(p)(2).
\14\ See current Rule 12100(u)(2).
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New Rule 12100(p)(1) would eliminate the five-year cooling-off
provision for persons who work in the financial industry by permanently
classifying persons who are, or were, affiliated with a specified
financial industry entity at any point in their careers, for any
duration, as non-public arbitrators. New Rule 12100(p)(1) would also
add two new categories of financial industry professionals who would be
permanently classified as non-public arbitrators: (i) Persons
associated with, including registered through, a mutual fund or hedge
fund, and (ii) persons associated with, including registered through,
an investment adviser.\15\
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\15\ Currently, FINRA Rules preclude these individuals from
serving as arbitrators in any capacity. See current Rule 12100(p)
and (u). If, however, they end their affiliation they may serve as
public arbitrators after a two-year cooling-off period. These
individuals may serve as non-public arbitrators if they are
qualified to serve under another provision (e.g., dually registered
as an investment adviser and an associated person of a FINRA
member).
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In addition, new Rule 12100(p)(1) would clarify certain references
made in the current rule. For instance, the new rule would replace ``[a
person] registered under the Commodity Exchange Act; a member of a
commodities exchange . . ., or associated with a person or firm
registered under the Commodity Exchange Act,'' \16\ with ``a person who
is, or was, associated with, including registered through, under, or
with (as applicable), . . . the Commodity Exchange Act or the
Commodities Futures Trading Commission[.]'' Also, instead of referring
to ``a member . . . of a registered futures association,'' \17\ new
Rule 12100(p)(1)(B) would identify the association as the National
Futures Association. Moreover, new Rule 12100(p)(1)(B) would include a
reference to ``[a person] who is, or was, associated with, including
registered through, under, or with (as applicable), . . . the Municipal
Securities Rulemaking Board.'' In addition, new Rule 12100(p)(1)(C)
would include a provision to cover any entity ``organized under or
registered pursuant to the Securities Exchange Act of 1934, Investment
Company Act of 1940, or the Investment Advisers Act of 1940.'' This
provision would cover financial industry affiliated persons not
otherwise specified in the rule and potential categories of financial
industry professionals that may be created in the future.
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\16\ See current FINRA Rule 12100(p)(1)(B)-(D).
\17\ See current FINRA Rule 12100(p)(1)(C).
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2. Proposed New Rule 12100(p)(2)
Under current Rule 12100(p)(3), attorneys, accountants, and other
professionals who devoted 20 percent or more of their professional work
in the last two years to serving specified financial industry entities
and/or employees, are classified as non-public arbitrators.\18\ Rule
12100(p)(3) permits these individuals to be reclassified as public
arbitrators two years after they stopped providing services to
specified financial industry entities, with one exception. A person who
provided services for 20 calendar years or more over the course of his
or her career is permanently disqualified from serving as a public
arbitrator.\19\
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\18\ The rule applies to the persons and entities listed in
current Rule 12100(p)(1).
\19\ See current Rule 12100(u)(2).
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Proposed new Rule 12100(p)(2) would broaden the application of
current Rule 12100(p)(3) in three ways: (i) It would increase the look-
back period from two years to five years, (ii) it would apply to not
only services provided to specified financial industry entities but
also to services provided to any persons or entities associated with
those specified financial industry entities, and (iii) it would
permanently disqualify from serving as public arbitrators persons who
provided the specified services for
[[Page 11697]]
15 calendar years or more over the course of their careers (in contrast
to the current 20 year provision).\20\
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\20\ See proposed new Rule 12100(u)(2). The 15 years are a total
number of years--they would not have to be consecutive years.
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In addition, the proposal would replace the phrase ``professional
work'' with ``professional time.''
3. Proposed New Rule 12100(p)(3)
Currently, FINRA rules permit individuals who represent or provide
professional services to investors in securities disputes to serve as
public arbitrators.\21\
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\21\ Currently, these individuals are not qualified under the
non-public arbitrator definition to serve as non-public arbitrators,
nor are they disqualified from serving as public arbitrators under
the public arbitration definition.
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Under proposed new Rule 12100(p)(3), attorneys, accountants, and
other professionals who devoted 20 percent or more of their
professional time, within the past five years, to serving parties in
investment or financial industry employment disputes would be
classified as non-public arbitrators. However, Rule 12100(p)(3) would
permit these individuals to serve as public arbitrators five years
after they stopped devoting 20 percent or more of their professional
time to serving parties in investment or financial industry employment
disputes with one exception. A person who provided services for 15
calendar years or more over the course of his or her career would be
permanently disqualified from serving as a public arbitrator.\22\
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\22\ See proposed new Rule 12100(u)(3). The 15 years are a total
number of years--they would not have to be consecutive years.
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4. Proposed New Rule 12100(p)(4)
Under current Rule 12100(p)(4), any person who is an employee of a
bank or other financial institution who (i) effects transactions in
securities, including government or municipal securities, and
commodities, futures, or options, or (ii) supervises or monitors the
compliance with the securities and commodities laws of employees who
engage in such activities is classified as a non-public arbitrator.
When these individuals end their affiliation, they are immediately
reclassified as public arbitrators unless they have engaged in this
type of work for 20 years or more over the course of their careers.\23\
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\23\ See current Rule 12100(u)(2).
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Proposed new Rule 12100(p)(4) would add a five-year look-back
period to this provision. Specifically, under proposed new Rule
12100(p)(4), any person who, within the last five calendar years, was
an employee of a bank or other financial institution who (i) effects
transactions in securities, including government or municipal
securities, commodities, futures, or options, or (ii) supervises or
monitors the compliance with the securities and commodities laws of
employees who engage in such activities would be classified as a non-
public arbitrator. However, proposed new Rule 12100(p)(4) would permit
these individuals to serve as public arbitrators five years after they
ended their industry affiliation unless they provided these services
for 15 years or more.\24\ After 15 years of service, the proposed rules
would permanently classify such individuals as non-public
arbitrators.\25\
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\24\ See proposed new Rule 12100(u)(4). The 15 years are a total
number of years--they would not have to be consecutive years.
\25\ See proposed new Rule 12100(u)(4).
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B. Public Arbitrator Definition
1. Proposed New Rule 12100(u)(1)
Current Rules 12100(u)(1) and 12100(u)(3) identify the types of
financial industry employment that disqualify a person from serving as
a public arbitrator by cross-referencing those activities listed in
current Rule 12100(p) (defining ``non-public arbitrators'').
Consequently, these otherwise qualified individuals are classified as
non-public arbitrators. Proposed new Rule 12100(u)(1) would retain the
types of financial industry employment that would disqualify a person
from serving as a public arbitrator with revisions identical to those
in proposed new Rule 12100(p)(1). Specifically: (i) Instead of
referring to ``[a person] registered under the Commodity Exchange Act;
a member of a commodities exchange . . ., or associated with a person
or firm registered under the Commodity Exchange Act,'' proposed new
Rule 12100(u)(1)(B) would refer to ``a person who is, or was,
associated with, including registered through, under, or with (as
applicable), . . . the Commodity Exchange Act or the Commodities
Futures Trading Commission;'' (ii) instead of referring to ``a member .
. . of a registered futures association,'' proposed new Rule
12100(u)(1)(B) would identify the association as the National Futures
Association; (iii) proposed new Rule 12100(u)(1)(B) would add a
reference to ``[a person] who is, or was, associated with, including
registered through, under, or with (as applicable), . . . the Municipal
Securities Rulemaking Board;'' and (iv) proposed new Rule
12100(p)(1)(C) would include a provision to cover any entity
``organized under or registered pursuant to the Securities Exchange Act
of 1934, Investment Company Act of 1940, or the Investment Advisers Act
of 1940.'' This provision would cover financial industry affiliated
persons not otherwise specified in the rule and potential categories of
financial industry professionals that may be created in the future.
As stated above, current FINRA Rule 12100 (p)(1) generally permits
individuals classified as non-public arbitrators to become reclassified
as public arbitrators five years after ending their affiliations
(subject to specified exceptions).\26\ As explained in the above
discussion on proposed new Rule 12100(p)(1), the proposal would
eliminate the five-year cooling-off period\27\ resulting in the
permanent classification of these individuals as non-public arbitrators
pursuant to new Rule 12100(u)(1).
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\26\ See supra notes 12, 12, and 13 and their accompanying text.
\27\ Current Rule 12100(u)(3) subjects investment advisers and
persons associated with, including registered through, a mutual fund
or hedge fund to a two-year cooling-off period after ending the
affiliation. Under proposed new Rule 12100(u)(1), these individuals
would also be subject to permanent classification as non-public
arbitrators.
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2. Proposed New Rules 12100(u)(2) and 12100(u)(6)\28\
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\28\ Although the descriptions of the disqualifications in
proposed new Rules 12100(u)(2) and 12100(u)(6) are almost identical,
FINRA believes it would add clarity to the definition to distinguish
when the provisions would result in a permanent classification, and
when they would result in a temporary classification. See Notice of
Filing, 79 FR 38080, 38084 (Jul. 3, 2014).
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Under current Rule 12100(u)(1), attorneys, accountants, and other
professionals who devoted 20 percent or more of their professional work
in the last two years to serving specified financial industry entities
and/or employees listed in current Rule 12100(p)(1), may not be
classified as public arbitrators. However, current Rule 12100(u)(1)
permits these individuals to be reclassified as public arbitrators two
years after they stopped providing those services, with one
exception.\29\ A person who provided services for 20 calendar years or
more over the course of his or her career is permanently disqualified
from serving as a public arbitrator.\30\
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\29\ See current Rule 12100(u)(1) (incorporating, among other
things, current Rule 12100(p)(3)).
\30\ See current Rule 12100(u)(2) (referencing the 20-year time
period).
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Proposed new Rules 12100(u)(2) and 12100(u)(6) would broaden the
provisions of current Rule 12100(u)(1) in three ways: (i) It would
apply to not only services provided to specified financial industry
entities but also to services provided to any persons or
[[Page 11698]]
entities associated with those specified financial industry
entities;\31\ (ii) new Rule 12100(u)(2) would decrease the number of
years for a permanent disqualification from 20 years to 15 years;\32\
and (iii) new Rule 12100(u)(6) would increase the cooling-off period
from two years to five years.\33\ In sum, the proposal would
permanently disqualify from serving as public arbitrators persons who
provided the specified services for 15 calendar years or more over the
course of their careers.
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\31\ Cf. current Rule 12100(p)(3) to illustrate the scope of
coverage to be expanded by proposed new Rule 12100(u)(2).
\32\ The 15 years are a total number of years--they would not
have to be consecutive years.
\33\ Substantively, proposed new Rules 12100(u)(2) and
12100(u)(6) are analogous to proposed new Rule 12100(p)(2).
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3. Proposed New Rules 12100(u)(3) and 12100(u)(7)
Under proposed new Rules 12100(u)(3) and 12100(u)(7) attorneys,
accountants, expert witnesses, and other professionals who devote 20
percent or more of their professional time annually to representing or
providing services to parties in disputes concerning investment
accounts or transactions, or employment relationships within the
financial industry generally would be classified as non-public
arbitrators.\34\ New Rule 12100(u)(7), however, would permit these
individuals to be reclassified as public arbitrators five years after
the final calendar year in which they devoted 20 percent or more of
their professional time providing those services with one exception. A
person who provided services for 15 calendar years or more over the
course of his or her career would be permanently disqualified from
serving as a public arbitrator.\35\
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\34\ The substance of proposed new Rules 12100(u)(3) and
12100(u)(7) corresponds to the substance of proposed new Rule
12100(p)(3).
\35\ See proposed new Rule 12100(u)(3). The 15 years are a total
number of years--they would not have to be consecutive years.
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4. Proposed New Rules 12100(u)(4) and 12100(u)(8)\36\
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\36\ Although the descriptions of the disqualifications in
proposed new Rules 12100(u)(4) and 12100(u)(8) are almost identical,
FINRA believes it would add clarity to the definition to distinguish
when the provisions would result in a permanent classification, and
when they would result in a temporary classification. See Notice of
Filing, 79 FR 38080, 38084 (Jul. 3, 2014).
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Under current Rule 12100(u)(1), any person who is an employee of a
bank or other financial institution and (i) effects transactions in
securities, including government or municipal securities, and
commodities, futures, or options, or (ii) supervises or monitors the
compliance with the securities and commodities laws of employees who
engage in such activities is classified as a non-public arbitrator.\37\
When these individuals end their affiliation, they may immediately be
reclassified as public arbitrators unless they have engaged in this
type of work for 20 years or more over the course of their careers.\38\
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\37\ See current Rule 12100(u)(1), which cross-references
current Rule 12100(p)(4), among other provisions.
\38\ See current Rule 12100(u)(2).
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Proposed new Rules 12100(u)(4) and 12100(u)(8) would broaden the
application of provisions of current Rule 12100(u)(1) in two ways: (i)
Proposed new Rule 12100(u)(8) would permit these individuals to be
reclassified as public arbitrators five years after they ended their
affiliation, and (ii) proposed new Rule 12100(u)(4) would decrease the
number of years required for a permanent classification as a non-public
arbitrator from 20 years to 15 years.\39\
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\39\ The 15 years are a total number of years--they would not
have to be consecutive years.
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5. Proposed New Rule 12100(u)(5)
Under current Rules 12100(u)(6) and 12100(u)(7), individuals who
are employed by,\40\ or who are directors or officers of,\41\ 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 are classified
as non-public arbitrators.\42\ These persons may become public
arbitrators two years after ending their affiliation.\43\
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\40\ See current Rule 12100(u)(6).
\41\ See current Rule 12100(u)(7).
\42\ Under current Rules 12100(u)(6) and 12100(u)(7), a spouse
or immediate family member of such individuals would also be
classified as a non-public arbitrator.
\43\ See current Rule 12100(u); see also infra note 49 and
accompanying text.
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Proposed new Rule 12100(u)(5) would broaden the provisions of
current Rules 12100(u)(6) and 12100(u)(7) in two ways: (i) It would
expand the scope of the classification by replacing the phrase
``securities business'' with ``financial industry,'' and (ii) it would
increase the cooling-off period from two years to five years.\44\
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\44\ Current Rule 12100(u) subjects individuals covered by
current Rules 12100(u)(6) and 12100(u)(7) to a two-year cooling-off
period after ending the affiliation. The disqualification for
spouses and immediate family members is addressed in proposed new
Rule 12100(u)(11), which retains a two-year cooling-off period after
ending the affiliation or relationship (discussed below).
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6. Proposed New Rule 12100(u)(9)
Under current Rule 12100(u)(4), an attorney, accountant, or other
professional whose firm derived 10 percent or more of its annual
revenue in the past two years from providing services to specified
financial industry entities is classified as a non-public arbitrator.
Similarly, under current Rule 12100(u)(5), any attorney, accountant, or
other professional whose firm derived $50,000 or more in annual revenue
in the past two years from providing professional services to any
specified financial industry entity relating to any customer dispute
concerning an investment account or transaction is also classified as a
non-public arbitrator. In both instances, however, current Rule
12100(u) permits such individuals to be reclassified as public
arbitrators two years after they ended their affiliation with the firm
or two years after the firm no longer derived annual revenue from
specified financial industry entities that exceeding those
thresholds.\45\
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\45\ Current Rule 12100(u) subjects individuals covered by
current Rules 12100(u)(4) and 12100(u)(5) to a two-year cooling-off
period after ending the affiliation.
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Proposed new Rule 12100(u)(9) would: (i) Merge current Rules
12100(u)(4) and 12100(u)(5), and (ii) remove the requirement that the
$50,000 in revenue relate to customer disputes concerning an investment
account or transaction. Specifically, under proposed new Rule
12100(u)(9) any person who is an attorney, accountant, or other
professional whose firm derived $50,000 or more, or at least 10 percent
of its annual revenue, in any single calendar year during the past two
calendar years, from (i) the entities listed in proposed new Rule
12100(u)(1) and/or from any persons or entities associated with such
listed entities, or (ii) a bank or other financial institution where
persons effect transactions in securities including government or
municipal securities, commodities, futures, or options would be
classified as a non-public arbitrator. Proposed new Rule 12100(u)(9)
would, however, permit such individuals to be reclassified as public
arbitrators two calendar years after ending their employment with the
employing firm.
7. Proposed New Rule 12100(u)(10)
Under proposed new Rule 12100(u)(10), attorneys, accountants, and
other professionals whose firm derived $50,000 or more, or at least 10
percent of its annual revenue, in any single calendar year during the
past two calendar years, from individual and/or institutional investors
relating to securities matters generally would be classified as non-
public arbitrators. Proposed new Rule 12100(u)(10) would, however,
permit such individuals to be
[[Page 11699]]
reclassified as public arbitrators two calendar years after ending
their employment with the employing firm or two years after the firm no
longer derived annual revenue from individual and/or institutional
investors relating to securities matters that exceeding those
thresholds.
8. Proposed New Rule 12100(u)(11)
Under current Rules 12100(u)(6) and 12100(u)(7), an individual
whose spouse or immediate family member is employed by,\46\ or is a
director or officer of,\47\ 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 is classified as a non-public arbitrator. These
persons may become public arbitrators two years after ending their
affiliation.\48\
---------------------------------------------------------------------------
\46\ See current Rule 12100(u)(6).
\47\ See current Rule 12100(u)(7).
\48\ See current Rule 12100(u).
---------------------------------------------------------------------------
In addition, under current Rule 12100(u)(8), an individual whose
spouse or immediate family member is engaged in the conduct or
activities described in current Rule 12100(p)(1)-(4) (i.e., is employed
by a specified financial entity or provides services to such an entity
and/or the entity's employees) is classified as a non-public
arbitrator.\49\
---------------------------------------------------------------------------
\49\ While current Rule 12100(u) does not include a cooling-off
period for this classification, FINRA stated that it has been its
practice to make these individuals wait for five years after their
spouse or immediate family member ends the disqualifying affiliation
before the individuals may be reclassified public arbitrators. See
Notice of Filing, 79 FR 38080, 38085 (Jul. 3, 2014).
---------------------------------------------------------------------------
Proposed new Rule 12100(u)(11) would: (i) Merge current Rules
12100(u)(6), 12100(7), and 12100(u)(8), and (ii) add a two year
cooling-off period. Specifically, under new Rule 12100(u)(11) a person
whose immediate family member is an individual whom FINRA would
disqualify from serving on the public arbitrator roster would be
classified as a non-public arbitrator. However, if the person's
immediate family member ends the disqualifying affiliation, or the
person ends the relationship with the individual so that the individual
is no longer the person's immediate family member, the person would be
able to be reclassified as a public arbitrator after two calendar years
had passed from the end of the affiliation or relationship.
9. Definition of ``Immediate Family Member''
Current Rule 12100(u) defines the term ``immediate family member''
to include a person's parent, stepparent, child, stepchild, member of a
person's household, an individual to whom a person provides financial
support of more than 50 percent of his or her annual income, or a
person who is claimed as a dependent for federal income tax purposes.
Current Rule 12100(u) does not define the term ``spouse.''
Proposed new Rule 12100(u) would amend the definition of
``immediate family member'' to add as immediate family members a
person's spouse, partner in a civil union, and domestic partner.
The text of the proposed rule change is available, at the principal
office of FINRA, on FINRA's Web site at http://www.finra.org, and at
the Commission's Public Reference Room. A more detailed description of
the proposed rule changes is contained in the Notice of Filing and the
Proceedings Order.\50\
---------------------------------------------------------------------------
\50\ See supra notes 3 and 7.
---------------------------------------------------------------------------
III. Comment Summary \51\
---------------------------------------------------------------------------
\51\ Some provisions of the proposed rule change would result in
a similar outcome--the permanent classification of certain
individuals as non-public arbitrators. Accordingly, where the
discussion of comments references specific provisions of the
proposal, that discussion may also apply to other provisions in the
proposal that would result in similar outcomes.
---------------------------------------------------------------------------
In response to the Notice of Filing, the Commission received 316
comment letters (including 295 copies of substantially the same letter
submitted by self-identified independent financial advisors). Five of
the commenters expressed support for the proposed rule change in its
entirety.\52\ Two commenters opposed the proposed rule change in its
entirety.\53\ The other commenters (including the independent financial
advisors) generally supported the proposed rule change in part, but
raised concerns about various aspects of the proposal.
---------------------------------------------------------------------------
\52\ See Aidikoff Letter, Bakhtiari July Letter, Caruso July
Letter, Gitomer July Letter, and SIFMA July Letter.
\53\ See SAC July Letter (stating that the proposed rule change
should be disapproved until a cost-benefit analysis is provided) and
Friedman July Letter (stating that FINRA should ``go back to the
drawing board'').
---------------------------------------------------------------------------
In response to the Proceedings Order, the Commission received
fourteen comments.\54\ Of these comments, four supported the
proposal,\55\ three opposed the proposal,\56\ and the remainder
partially supported or opposed aspects of the proposal.\57\
---------------------------------------------------------------------------
\54\ See supra note 8.
\55\ See Caruso October Letter, Bakhtiari October Letter,
Gitomer November Letter, and SIFMA November Letter.
\56\ See Bender Letter, Friedman October Letter, and SAC October
Letter.
\57\ See UMIRC Letter, GSU Letter, AIG Letter, CSLC Letter,
NASAA November Letter, PIRC First November Letter, and PIRC Second
November Letter.
---------------------------------------------------------------------------
A. Permanent Classification of Industry Employees as Non-Public
Arbitrators
In general, the proposal would result in the permanent
classification (or reclassification of current public arbitrators) of
individuals who worked in the financial industry (a) in any capacity,
(b) at any point, and (c) for any duration, (``Industry Affiliates'')
as non-public arbitrators. Many commenters opposed the permanent
classification of Industry Affiliates as non-public arbitrators for
varying reasons.\58\
---------------------------------------------------------------------------
\58\ See, e.g., Type A Letter, FSI Letter, Getman Letter, and
Vernon Letter.
---------------------------------------------------------------------------
1. Elimination of the Cooling-Off Period
In general, the proposal would result in the classification (or
reclassification of current public arbitrators) of individuals as non-
public arbitrators who otherwise would have been classified as public
arbitrators. Specifically, individuals who worked in the financial
industry for any duration would be permanently classified as non-public
arbitrators (effectively eliminating the five-year cooling-off
period).\59\
---------------------------------------------------------------------------
\59\ See proposed new Rules 12100(p)(1) and (u)(1).
---------------------------------------------------------------------------
Several commenters supported this provision as providing a workable
``bright-line'' test that would address criticism regarding bias
(perceived or actual) in favor of the financial industry,\60\ including
one that stated that eliminating the five-year cooling-off period would
eliminate industry-side potential and perceived bias.\61\
---------------------------------------------------------------------------
\60\ See Aidikoff Letter; see also Caruso October Letter,
Bakhtiari October Letter, Gitomer November Letter, SIFMA November
Letter, CSLC Letter Bakhtiari July Letter, SIFMA July Letter, NASAA
July Letter, PIABA Letter, and AAJ Letter.
\61\ See SIFMA November Letter.
---------------------------------------------------------------------------
Many commenters opposed eliminating the five-year cooling-off
period for Industry Affiliates.\62\ Some of these commenters expressed
concern that eliminating the cooling-off period could exclude
arbitrators with industry experience who could be useful on a panel to,
among other things, educate the other panelists on industry
practice.\63\ Another commenter suggested that FINRA classify Industry
Affiliates as neither public nor non-public arbitrators for a set
number of years following the date they end their affiliation with the
financial industry.\64\
[[Page 11700]]
This commenter also opposed categorizing any industry employee,
regardless of capacity, as a non-public arbitrator. For example, this
commenter suggested that industry employees who are clerical should be
classified as neither public nor non-public arbitrators.\65\
---------------------------------------------------------------------------
\62\ See Bender Letter, Friedman October Letter, SAC October
Letter, Type A Letter, FSI Letter, Getman Letter, Berthel Letter,
and Vernon Letter.
\63\ See Type A Letter and Berthel Letter; see also FSI Letter.
\64\ See Friedman October Letter; see also PIRC July Letter and
FSI Letter (suggesting that FINRA should adopt a cooling-off period
for industry employees that would be proportional to the number of
years they were Industry Affiliates).
\65\ See Friedman October Letter.
---------------------------------------------------------------------------
In its response, FINRA disagreed with the opposing commenters,
stating that its constituents agreed that any cooling off period for
financial industry employees would ``leave a perception of unfairness
for some advocates.'' \66\ In addition, FINRA stated that investor
advocates have a stated preference for using expert witnesses and
making their own arguments rather than relying on members of the
arbitration panel that have industry experience to explain and
influence matters.\67\ FINRA also stated, however, that former industry
employees have valuable knowledge and experience, and that completely
removing them from arbitrator service would negatively impact the
forum.\68\ Similarly, FINRA stated that if an Industry Affiliate meets
FINRA's qualifications for service as an arbitrator (regardless of the
capacity in which she or he served the financial industry), she or he
should be classified as a non-public arbitrator.\69\ FINRA stated that
parties to an arbitration would continue to have the authority to
strike any or all arbitrators on the non-public list.\70\
---------------------------------------------------------------------------
\66\ See FINRA September Letter.
\67\ Id.
\68\ See FINRA November Letter; see also FINRA September Letter.
\69\ See FINRA November Letter; see also FINRA September Letter.
\70\ See FINRA November Letter; see also FINRA September Letter.
---------------------------------------------------------------------------
Ultimately, FINRA stated that it believes that it is more workable
to use a bright-line test than a pro rata cooling-off period for
financial industry employees.\71\ Accordingly, FINRA declined to amend
the proposed rule change.\72\
---------------------------------------------------------------------------
\71\ See FINRA September Letter.
\72\ See FINRA September Letter and FINRA November Letter.
---------------------------------------------------------------------------
2. All Employees, Regardless of Capacity, To Be Classified as Non-
Public Arbitrators
Four commenters stated that, as proposed, the rule would improperly
characterize certain individuals without true financial industry
experience as non-public arbitrators.\73\ One of these commenters
expressed concern that individuals performing solely clerical or
ministerial functions for a financial industry firm would be classified
as non-public arbitrators because they would be considered ``associated
persons'' as defined by Rule 12100(p).\74\ Accordingly, this commenter
suggested FINRA amend the definition of the term ``associated person''
in the proposal to track the definition of the term ``associated
person'' in section 3(a)(18) of the Act, which excludes individuals
performing solely clerical or ministerial functions. Another commenter
suggested that the proposal should only classify individuals who
``worked for [a financial industry firm] in a capacity for which
testing and registration is required'' as non-public arbitrators to
address this concern.\75\
---------------------------------------------------------------------------
\73\ See Stephens Letter, FSI Letter, Getman Letter, and Vernon
Letter.
\74\ See Stephens Letter.
\75\ See Vernon Letter (expressing concern that under the
proposal [the commenter] could be characterized as a non-public
arbitrator based solely on his capacity as a ``trainee'' for Merrill
Lynch in 1983).
---------------------------------------------------------------------------
In its response, FINRA stated that its staff believes that
``investor concerns about the neutrality of the public roster apply to
all industry employees, including those who serve in clerical or
ministerial positions.'' \76\ In addition, FINRA stated that it
believes that if a financial industry affiliate meets FINRA's
qualifications for service as an arbitrator, FINRA should appoint the
person to the non-public arbitrator roster.\77\ Accordingly, FINRA
declined to amend the proposed rule change.\78\
---------------------------------------------------------------------------
\76\ See FINRA September Letter.
\77\ See FINRA November Letter.
\78\ See FINRA September Letter and FINRA November Letter.
---------------------------------------------------------------------------
B. Classification of Professionals
1. Classifying Investor Advocates as Non-Public Arbitrators
In general, the proposed rule change would classify attorneys,
accountants, expert witnesses, or other professionals who (a) devote 20
percent or more of their professional time (b) in any single calendar
year within the past five calendar years (c) to representing or
providing services to parties in disputes concerning investment
accounts or transactions, or employment relationships within the
industry (``Investor Advocates'') as non-public arbitrators.\79\
Currently, individuals meeting this description are classified as
public arbitrators.
---------------------------------------------------------------------------
\79\ See proposed new Rule 12100(p)(3).
---------------------------------------------------------------------------
Several commenters supported this provision,\80\ including two
commenters that indicated that this provision is necessary to eliminate
potential and perceived investor-side bias.\81\ Specifically, one of
these commenters stated that the rationale for eliminating perceived
bias is the same for both public and non-public arbitrators.\82\
Another commenter stated that eliminating perceived investor-side bias
is necessary in light of the implementation of the all-public-panel
rule.\83\ Similarly, one commenter noted that the historical
distinction of classifying arbitrators as pubic arbitrators based on
their financial industry experience was compelling when FINRA required
the presence of someone with financial industry experience on all
panels, but is no longer necessary with the advent of the all-public-
panel rule.\84\
---------------------------------------------------------------------------
\80\ See Caruso October Letter, Bakhtiari October Letter,
Gitomer November Letter, SIFMA November Letter, AIG Letter, FSI
Letter, Bethel Letter, and SIFMA July Letter. The commenters who
used the Type A Letter also supported this provision.
\81\ See SIFMA November Letter and AIG Letter.
\82\ See SIFMA November Letter; see also SIFMA July Letter
(stating that the proposal ``strike[s] an appropriate balance in the
interests of fairness, perceptions of fairness, and arbitrator
neutrality for all parties'').
\83\ See AIG Letter.
\84\ See SIFMA November Letter.
---------------------------------------------------------------------------
Several commenters also opposed the classification of Investor
Advocates as non-public arbitrators,\85\ including some commenters who
supported the classification of industry-affiliated persons as non-
public arbitrators.\86\ Many of these commenters stated that including
investor representatives in the public arbitrator pool counteracts some
of the existing perceived bias in favor of the financial industry in
the FINRA arbitration forum.\87\ One commenter stated that ``[he could
not] fathom how this [provision] would further investor protection.''
\88\ Two other commenters stated that there is no evidence supporting
the assumption that professionals who serve the investing public have
any bias either for or against
[[Page 11701]]
the financial industry.\89\ Another commenter stated that it believes
that the classification of Investor Advocates as non-public arbitrators
is inconsistent with the concept of a ``public'' arbitrator.\90\ Two
commenters argued that there is a perception that the arbitration
system is unfair or always ``stacked against'' investors and that ``any
proposal to change the definitions of public and non-public arbitrator
should be focused on mitigating the investing public's perception of
bias, not the industry's perception of bias.'' \91\ Another commenter
asserted that the ``public'' and ``non-public'' labels were never
intended to account for biases in favor of the investing public but
rather to eliminate arbitrators' perceived and actual bias against
customers who are compelled to participate in this forum by the
financial industry.\92\ This commenter also argued that the proposed
new classifications would cause confusion because Investor Advocates
generally represent the public and would naturally be considered to be
associated with the ``public'' pool.\93\
---------------------------------------------------------------------------
\85\ See Bender Letter, Friedman October Letter, SAC October
Letter, UMIRC Letter, GSU Letter, CSLC Letter, NASAA November
Letter, PIRC Second November Letter, NASAA July Letter, PIABA
Letter, Stephens Letter, PIRC July Letter, Bacine Letter, Mass
Letter, Hardiman Letter, and Friedman July Letter.
\86\ See, e.g., CSLC Letter and NASAA November Letter; see also
NASAA July Letter (arguing that FINRA should classify as non-public
arbitrators only persons ``representing or providing services to
non-retail parties in disputes concerning investment accounts or
transactions, or employment relationships within the financial
industry''), Stephens Letter (arguing that FINRA should only
classify as non-public arbitrators persons ``. . . representing or
providing services to parties in disputes [other than customers]
concerning investment accounts . . .''), and Bacine Letter (arguing
that the distinction between public and non-public arbitrators has
always been based on whether the arbitrators had industry experience
and argued for keeping this distinction).
\87\ See, e.g., CSLC Letter, NASAA July Letter, and PIABA
Letter.
\88\ See Friedman October Letter.
\89\ See GSU Letter and PIABA Letter.
\90\ See NASAA November Letter; see also Mass Letter (asserting
that lawyers who represent investors or claimants are public
arbitrators because they work on behalf of the public at large
against the financial industry), and Hardiman Letter (stating that
classifying Investor Advocates as non-public arbitrators would be
``burying professionals who represent the investing public in the
industry non-public side'').
\91\ See CSLC Letter (citing the NASAA July Letter and PIABA
Letter) and PIRC Second November Letter.
\92\ See UMIRC Letter.
\93\ See UMIRC Letter; see also, e.g., Stephens Letter, NASAA
July Letter, PIABA Letter, PIRC July Letter, Bacine Letter (stating
that the proposal would create confusion since the U.S. courts, the
American Arbitration Association, and the general public generally
view professionals who represent investors to be ``public
arbitrators''), and PIRC July Letter (stating that past NASD
response letters, as well as the FINRA Web site, also make the
distinction that professionals who represent investors are typically
public arbitrators).
---------------------------------------------------------------------------
In the Notice of Filing, FINRA stated that it proposed the
reclassification of arbitrator categories in response to concerns
regarding the neutrality of the public arbitrator roster raised by both
investor representatives and industry representatives.\94\ Similarly,
in its response FINRA stated that addressing both investor and industry
perceptions of bias in the public arbitrator roster would better
safeguard the integrity of its arbitration forum.\95\ FINRA also stated
that parties would continue to receive extensive disclosure statements
on each proposed arbitrator that describe in detail that arbitrator's
background. Accordingly, FINRA believes that under the proposal parties
in customer cases would be able to address their own perceptions of
bias that may arise under the proposal through the use of their
unlimited strikes on the list of non-public arbitrators.\96\ Thus,
FINRA declined to amend the proposed rule change.\97\
---------------------------------------------------------------------------
\94\ See Notice of Filing, 79 FR 38080, 38081 (Jul. 3, 2014);
see also FINRA September Letter (stating that industry constituents
have expressed concern about the neutrality of the public arbitrator
roster because of the presence on the roster of Investor Advocates).
\95\ See FINRA November Letter.
\96\ Id.
\97\ See FINRA September Letter and FINRA November Letter.
---------------------------------------------------------------------------
2. Five-Year Cooling-Off Period for Professionals Representing Industry
In general, the proposed rule change would extend the cooling-off
period from two years to five years for attorneys, accountants, expert
witnesses, or other professionals who (a) devote 20 percent or more of
their professional time (b) in any single calendar year within the past
five calendar years (c) to representing or providing services to
financial industry firms (``Industry Advocates'').
Three commenters generally supported this provision as fair and
acknowledged the consistency of approach towards professionals
representing investors and those representing industry.\98\ Another
commenter generally supported removing Industry Advocates from the
public arbitrator roster, but believed that they should be permanently
classified as non-public arbitrators like financial industry employees
(i.e., the commenter suggested that FINRA eliminate the cooling-off
period rather than extend it).\99\
---------------------------------------------------------------------------
\98\ See SIFMA July Letter, PIABA Letter, and Berthel Letter.
\99\ See NASAA July Letter.
---------------------------------------------------------------------------
In its response, FINRA stated that it has drawn a distinction
between individuals who work in the financial industry and individuals
who provide services to the financial industry. FINRA also stated its
belief that to help ensure fairness to all forum users, it needed to
take a consistent approach to cooling-off periods for service providers
to both investors and the financial industry.\100\ Accordingly, FINRA
declined to amend the proposed rule change.\101\
---------------------------------------------------------------------------
\100\ See FINRA September Letter.
\101\ Id.
---------------------------------------------------------------------------
3. Using Professional Time To Quantify Professional Work
As stated above, the proposal would classify attorneys,
accountants, expert witnesses, or other professionals as either public
arbitrators or non-public arbitrators depending on, among other things,
the percentage of time those individuals devoted to representing either
the financial industry or investors.\102\ Some commenters questioned
the appropriateness of classifying individuals as public or non-public
arbitrators based on the ``amount of time'' an individual devotes to a
client.\103\ Alternatively, commenters suggested using revenue instead
of professional time as the metric to quantify professional work.\104\
One of these commenters suggested that revenue is a better measurement
since not all professionals track their work in terms of time, but all
professionals would have a record of revenue.\105\ Another one of these
commenters stated that using professional time as the metric would
categorize professors and supervisors in investor advocacy clinics as
non-public arbitrators, even though the clinic does not earn any
revenues and the primary function of the clinic is educational.\106\
---------------------------------------------------------------------------
\102\ See proposed new Rule 12100(p)(3).
\103\ See UMIRC Letter and PIRC July Letter.
\104\ See UMIRC Letter and PIRC July Letter.
\105\ See PIRC July Letter.
\106\ See UMIRC Letter.
---------------------------------------------------------------------------
In its response, FINRA stated that given the purpose of the
proposal is to address the perception that professionals who regularly
provide services to investors might be biased in favor of investors, it
does not believe that it would be appropriate to make an exception for
employees of law school investor advocacy clinics.\107\ FINRA also
stated that the proposed rule change regarding ``professional time''
was specifically discussed by its National Arbitration and Mediation
Committee (``NAMC'') \108\ and it agreed that the change ``added
clarity to the rule text, was simpler to apply, and would result in
more accurate calculations by arbitrator applicants and arbitrators
reviewing their business mix.'' \109\ Accordingly, FINRA declined to
amend the proposed rule change.\110\
---------------------------------------------------------------------------
\107\ See FINRA November Letter.
\108\ NAMC provides policy guidance to FINRA Dispute Resolution
staff. Its members include investors, securities industry
professionals, and FINRA arbitrators and mediators. A majority of
NAMC's members and its chair are non-industry representatives. See
FINRA Advisory Committees, National Arbitration and Mediation
Committee, available at http://www.finra.org/aboutfinra/leadership/committees/p197363.
\109\ See FINRA September Letter and FINRA November Letter.
\110\ See FINRA September Letter and FINRA November Letter.
---------------------------------------------------------------------------
[[Page 11702]]
4. Impact to the Pool of Public Arbitrators
a. Number of Available Public Arbitrators
Since February 1, 2011, customers have been able to choose an
arbitration panel composed entirely of public arbitrators (i.e., an
``all-public panel'').\111\ One commenter cited statistics that
indicated that customers in approximately three-quarters of eligible
cases choose an all-public panel.\112\ Another commenter estimated that
public arbitrators account for approximately 85% of those that
serve.\113\ Consequently, several commenters expressed concern that the
proposed rule change would negatively impact the number of public
arbitrators available to serve in FINRA's arbitration forum.\114\
Similarly, some commenters suggested that under the proposed rule
change FINRA would need to devote resources to recruit additional
public arbitrators.\115\
---------------------------------------------------------------------------
\111\ See Exchange Act Release No. 70442 (Sept. 18, 2013), 78 FR
58580 (Sept. 24, 2013) (order approving a proposed rule change to,
among other things, permit all parties to select an all-public
panel) and Exchange Act Release No. 63799 (Jan. 31, 2011), 76 FR
6500 (Feb. 4, 2011) (order approving a proposed rule change to
provide customers with the option to choose an all-public panel in
all cases).
\112\ See UMIRC Letter (citing Exchange Act Release No. 69762
(Jun. 13, 2013), 78 FR 37267, 37268 (Jun. 20, 2013) (Notice of
Filing of Proposed Rule Change Relating to Amendments to the Code of
Arbitration Procedure for Customer Disputes Concerning Panel
Composition)).
\113\ See SAC October Letter.
\114\ See, e.g., Bender Letter, PIRC First November Letter, GSU
Letter, SAC October Letter, Friedman October Letter, UMIRC Letter,
Friedman July Letter, SAC July Letter, NASAA July Letter, and FSI
Letter.
\115\ See SAC July Letter and NASAA July Letter.
---------------------------------------------------------------------------
Several commenters questioned FINRA's estimate that the total
number of arbitrators that would be reclassified from public
arbitrators to non-public arbitrators would be approximately 474 \116\
out of 3,567 current public arbitrators (approximately 13.3%).\117\ A
number of commenters stated that they believe that FINRA severely
underestimated the number of arbitrators that would be
reclassified.\118\ Some commenters estimated that the number of public
arbitrators that would be reclassified is approximately one-fourth or
25% of the current public arbitrator pool.\119\ Consequently,
commenters expressed concern that the proposal would result in delays
in arbitration proceedings due to an insufficient number of
arbitrators.\120\ Two commenters cited the recent stay in arbitration
proceedings in Puerto Rico as an example of the possible outcome if the
pool of public arbitrators is drastically reduced in some geographic
areas.\121\
---------------------------------------------------------------------------
\116\ In the FINRA September Letter, FINRA estimated that 374
arbitrators would be reclassified from public to non-public
arbitrators as a result of having had a Central Registration
Depository (``CRD'') number at some point in their careers or having
had an affiliation with a firm with a CRD number. In addition, FINRA
estimated that approximately 100 arbitrators would be reclassified
from public to non-public as a result of having identified an
affiliation with PIABA; see also FINRA November Letter.
\117\ See FINRA November Letter (basing its estimate on a survey
of databases to which FINRA has access); see also FINRA September
Letter.
\118\ See Bender Letter, SAC October Letter, UMIRC Letter, PIRC
November Letter, and GSU Letter.
\119\ See Bender Letter and SAC October Letter.
\120\ See SAC October Letter and UMIRC Letter; see also FSI
Letter.
\121\ See SAC October Letter and UMIRC Letter; see also SAC July
Letter (suggesting that the potential shortage of public arbitrators
may be more concentrated in some locations than others).
---------------------------------------------------------------------------
In its response, FINRA acknowledged commenters' concerns about
reducing the number of public arbitrators currently on the public
arbitrator roster. FINRA also stated, however, that it believes that
addressing users' perceptions of the neutrality of its public
arbitrators outweighs those concerns.\122\ In addition, FINRA stated
that it intends to address commenters' concerns as well, stating its
commitment to aggressively recruiting arbitrators to help ensure that
``the forum has a sufficient number of public arbitrators to serve the
needs of forum users in each of its hearing locations.'' \123\
Specifically, FINRA illustrated its ongoing efforts to recruit public
arbitrators since the adoption of the all-public panel rule.\124\ In
addition, FINRA expressed its commitment to arbitrator retention,
citing its recent rule proposal to increase the amount of honoraria
arbitrators receive in connection with serving on a panel.\125\ In its
response, FINRA concluded that despite the temporary decrease in the
number of public arbitrators resulting from the proposed rule change,
the FINRA forum will have a sufficient number of public arbitrators to
serve the immediate needs of forum users.\126\ In addition, FINRA
stated that if the proposal was approved it would focus its recruiting
efforts on the hearing locations most impacted by the rule change and
that it would assign additional staff to recruitment as necessary.\127\
Accordingly, FINRA declined to amend the proposed rule change.\128\
---------------------------------------------------------------------------
\122\ See FINRA November Letter.
\123\ See FINRA November Letter and FINRA December Letter; see
also FINRA September Letter.
\124\ See FINRA November Letter and FINRA December Letter
(collectively citing, for example, the Puerto Rico bond fund
disputes for which FINRA stated that its staff conducted recruitment
activities in Puerto Rico and asked arbitrators in hearing locations
in the Southeast Region and Texas if they would be willing to serve
in Puerto Rico. FINRA stated that its recruitment efforts have
resulted in almost 200 applications from Puerto Rico residents to
serve on its roster, and approximately 800 arbitrators currently on
its roster who have agreed to hear cases in Puerto Rico).
\125\ See Exchange Act Release No. 73245 (Sept. 29, 2014), 79 FR
58976 (Oct. 3, 2014) (Order Approving Proposed Rule Change to Amend
the Code of Arbitration Procedure for Customer Disputes and the Code
of Arbitration Procedure for Industry Disputes to Increase
Arbitrator Honoraria and Increase Certain Arbitration Fees and
Surcharges).
\126\ See FINRA September Letter, FINRA November Letter, and
FINRA December Letter.
\127\ See FINRA December Letter; see also FINRA September Letter
(stating that if the proposal was approved, it would conduct a more
detailed analysis to determine whether additional arbitrator
recruitment efforts were necessary in any particular geographic area
and would deploy the necessary resources to avoid any undue delay in
the arbitration process).
\128\ See FINRA September Letter and FINRA November Letter.
---------------------------------------------------------------------------
b. Quality of Public Arbitrator Pool
Several commenters expressed concern that the proposed rule change
would negatively impact the quality of public arbitrators available to
serve in FINRA's arbitration forum.\129\ In particular, these
commenters were concerned that the classification of Investor Advocates
as non-public arbitrators would diminish the number of qualified public
arbitrators.\130\ For example, one commenter stated that the proposal
would result in the most highly trained public arbitrators for
customer-member cases being reclassified as non-public
arbitrators.\131\ Another commenter stated more generally that the
proposal would ``gut the public arbitrator pool of many experienced and
knowledgeable arbitrators'' and result in a ``brain drain'' of the
public arbitrator pool.\132\
---------------------------------------------------------------------------
\129\ See, e.g., Bender Letter, PIRC First November Letter, GSU
Letter, and SAC October Letter.
\130\ See, e.g., Bender Letter, PIRC First November Letter, GSU
Letter, and SAC October Letter.
\131\ See Bender Letter.
\132\ See PIRC First November Letter.
---------------------------------------------------------------------------
In its response, FINRA stated that the proposed rule change would
not reduce the total number of arbitrators available for selection but
rather would shift them to another part of the roster. Accordingly,
FINRA stated that it does not believe that the proposed rule change
would drain from the forum the experience and expertise of those
arbitrators being reclassified as non-public. FINRA stated that
instead, the parties would receive a complete description of the
background and experience of each arbitrator on the non-public list and
could use that information to rank or strike them accordingly. FINRA
stated that the proposal would effectively maintain the reclassified
individuals in the pool of
[[Page 11703]]
arbitrators as non-public arbitrators to be able to continue to utilize
their experience and expertise while eliminating the industry's
perception of bias of these arbitrators.\133\ In addition, FINRA
acknowledged the need for aggressive arbitrator recruitment to help
ensure that the forum has a sufficient number of qualified public
arbitrators \134\ and outlined the measures it intends to undertake to
fulfill this objective.\135\ Accordingly, FINRA declined to amend the
proposed rule change.\136\
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\133\ See FINRA November Letter.
\134\ See FINRA November Letter and FINRA December Letter.
\135\ See FINRA December Letter.
\136\ See FINRA November Letter.
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5. Impact on Qualified Chairpersons
Several commenters expressed concern that the proposed rule change
would negatively impact the quantity and quality of chairpersons
available to serve in FINRA's arbitration forum.\137\ Some commenters
suggested changes to the qualification requirements for chairpersons in
customer cases, such as allowing arbitrators with investor
relationships to serve as chairpersons or requiring that the
chairperson be a judge or hold a law degree.\138\
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\137\ See Stephens Letter and Bacine Letter (expressing concern
that classifying professionals who provide services to customers as
non-public arbitrators would negatively impact the quality of
chairman-eligible arbitrators); see also Bender Letter.
\138\ See Bacine Letter and Berthel Letter.
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In its response, FINRA stated that allowing arbitrators with
investor relationships to serve as chairpersons would nullify the
effort to address perceived bias.\139\ FINRA also noted that more than
75 percent of the public chair-qualified arbitrators are attorneys and
therefore stated that it does not believe that changes to the chair
qualifications are necessary.\140\ Accordingly, FINRA declined to amend
the proposed rule change.\141\
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\139\ See FINRA September Letter.
\140\ Id.
\141\ Id.
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6. Cost-Benefit Analysis
a. Timing
Several commenters stated that the proposed rule change should not
be approved until FINRA obtained additional data and published a
detailed cost-benefit analysis justifying the proposal.\142\ In
particular, these commenters expressed concern with FINRA's commitment
\143\ to perform a detailed cost-benefit analysis after the proposal
was implemented in order to assess its impact and determine where to
allocate additional resources for arbitrator recruitment.\144\ Two of
these commenters stated that if FINRA ultimately finds the impact of
the proposed rule change unsupportable, forum participants would have
to comply with a ``bad'' rule while proceedings are pending to approve
a subsequent rule change.\145\ One of these commenters also stated that
if the effort to conduct a cost-benefit analysis is to be expended in
any event, conducting it prior to implementing the proposal could
streamline implementation of the proposed rule change.\146\
---------------------------------------------------------------------------
\142\ See SAC July Letter, Friedman July Letter, Estell Letter,
Friedman October Letter, PIRC First November Letter, and SAC October
Letter (questioning whether the depletion of public arbitrators
resulting from the proposed rule change would lead to delays in
hearing claims).
\143\ See FINRA September Letter.
\144\ See, e.g., SAC October Letter and PIRC First November
Letter.
\145\ See SAC October Letter and PIRC First November Letter.
\146\ See SAC October Letter; see also Estell Letter (suggesting
that FINRA make information about each arbitrator publicly
available, particularly to academic researchers, and that the data
could provide FINRA with statistical proof of bias or lack of bias
upon which to base its proposal instead of relying on perceptions of
bias).
---------------------------------------------------------------------------
In its response, FINRA stated that a cost-benefit analysis, while
useful for planning purposes, does not outweigh the imperative of
addressing the users' perception of neutrality in maintaining the
integrity of the forum, and that fairness requires FINRA to address the
concerns of all forum users.\147\ Further, FINRA noted that the
``proposed rule change is the culmination of extensive dialogue with
FINRA constituents and FINRA filed the proposed rule change at the
urging of its constituents.'' \148\ In addition, FINRA stated that
performing a cost-benefit analysis would be time-intensive and require
a survey of every public arbitrator on its roster.\149\ In the interim,
FINRA performed a preliminary analysis of databases currently available
to it to obtain estimates of the potential impact of the proposal
(discussed above).\150\ FINRA also committed to perform a cost-benefit
analysis if the proposal is approved.\151\
---------------------------------------------------------------------------
\147\ See FINRA November Letter; see also FINRA September
Letter.
\148\ See FINRA November Letter; see also FINRA September
Letter.
\149\ See FINRA September Letter.
\150\ See FINRA November Letter and FINRA December Letter; see
also FINRA September Letter.
\151\ See FINRA September Letter.
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b. Potential Forum Delays
Three commenters stated that by failing to conduct an in-depth
analysis of the impact of the proposed rule change, FINRA failed to
weigh the consequences of its actions.\152\ For example, one commenter
suggested that FINRA may not currently have enough public arbitrators
and that this shortage of public arbitrators may be contributing to an
increase in overall case turnaround time.\153\ Similarly, two
commenters identified the lack of a cost-benefit analysis as a reason
that FINRA has underestimated the potential impact of the proposal on
the public arbitrator pool.\154\
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\152\ See Friedman October Letter, SAC October Letter, and PIRC
November Letter.
\153\ See SAC October Letter; see also Friedman July Letter and
SAC July Letter (expressing concern that a decrease in the number of
public arbitrators could result in greater delays in arbitrating
claims, particularly (1) during declines in the financial markets
(when the number of arbitration claims filed increases) or (2) in
certain hearing locations with smaller rosters of arbitrators).
\154\ See Friedman October Letter, SAC October Letter, SAC July
Letter, and Friedman July Letter.
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Alternatively, one commenter stated that FINRA's representations
that the proposal would not affect a significant number of arbitrators
are sufficient.\155\ This commenter also stated that even if the impact
to the public arbitrator pool is greater than anticipated, it is a
small price to pay for arbitrator neutrality.\156\
---------------------------------------------------------------------------
\155\ See SIFMA November Letter.
\156\ Id.
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In its response, FINRA stated that it monitors the amount of time
it takes to process a claim in its forum and has not heard from forum
users that arbitrator availability is causing delays in processing
cases. Instead, FINRA stated that various other factors are more likely
to result in delays, including party-initiated postponements; an
increase in the number of hearing sessions per case; concentration of
law firms representing the majority of parties; and efforts to verify
arbitrators' disclosures to protect parties from undisclosed arbitrator
conflicts.\157\ Moreover, as discussed above, FINRA stated that it
recognizes the need for aggressive arbitrator recruitment to address
any potential impact and outlined the steps it expects to take in its
aggressive recruitment and retention of public arbitrators.\158\
---------------------------------------------------------------------------
\157\ See FINRA November Letter.
\158\ See FINRA November Letter and FINRA December Letter.
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7. Consideration of the Proposal by FINRA's Dispute Resolution Task
Force
Two commenters suggested that FINRA withdraw the proposal and
submit it to its recently formed Arbitration Task Force \159\ for
[[Page 11704]]
consideration.\160\ One of these commenters suggested that the Task
Force should be permitted to consider the proposal after a full impact
analysis is conducted so that the Task Force would have the benefit of
this analysis for its consideration.\161\
---------------------------------------------------------------------------
\159\ See FINRA News Release, FINRA Announces Arbitration Task
Force (Jul. 17, 2014), available at http://www.finra.org/Newsroom/NewsReleases/2014/P554192 (announcing the formation of an
Arbitration Task Force to consider possible enhancements to improve
transparency, impartiality and efficiency of FINRA's securities
arbitration forum for all participants).
\160\ See Friedman October Letter and SAC October Letter; see
also Friedman July Letter.
\161\ See SAC October Letter.
---------------------------------------------------------------------------
In its response, FINRA stated that it has engaged in a
comprehensive process soliciting input from interested groups.\162\ It
also stated that the proposal reflects a balanced approach on
classifying arbitrators that would enhance forum users' perception of
fairness of the forum.\163\ In addition, FINRA stated that while the
Task Force is setting its own agenda and is free to discuss the
arbitrator definitions, it does not expect to make any recommendations
until the fall of 2015, which would make it unlikely for FINRA to file
any proposed rule change based on Task Force recommendations until at
least 2016.\164\ FINRA indicated that it does not believe that it would
be in the best interests of forum users to delay action on this fully
considered proposal.\165\
---------------------------------------------------------------------------
\162\ See FINRA November Letter; see also FINRA September
Letter.
\163\ See FINRA November Letter; see also FINRA September
Letter.
\164\ See FINRA November Letter.
\165\ See FINRA September Letter and FINRA November Letter.
---------------------------------------------------------------------------
8. Alternative Solutions
Several commenters suggested alternatives to the proposal.\166\ For
example, two commenters suggested that FINRA require arbitrators to
disclose additional information about themselves, including their mix
of work and the percentage of revenue derived from representation for
or against the financial industry, so that parties can make independent
determinations about each arbitrator.\167\ One of these commenters also
suggested that FINRA eliminate the labels of public and non-public
altogether and allow parties to choose from a single pool of
arbitrators.\168\ Another commenter stated that Industry Affiliates
should not permanently remain classified as non-public arbitrators but
rather should be reclassified as being precluded from acting as an
arbitrator in any capacity (i.e., a ``no-man's land'') for a number of
years after ceasing their respective affiliation with the financial
industry.\169\ Three other commenters objected to broker-dealers' use
of pre-dispute mandatory arbitration agreements.\170\ Other commenters
suggested ways to improve the quality of arbitration panels.\171\
---------------------------------------------------------------------------
\166\ See Bender Letter, NASAA November Letter, PIRC First
November Letter, Friedman July Letter, and Nicinski Letter.
\167\ See Bender Letter and PIRC First November Letter; see also
Estell Letter.
\168\ See PIRC First November Letter; see also Nicinski Letter.
\169\ See Friedman October Letter; see also Friedman July Letter
(suggesting that instead of public and non-public, arbitrators
should be classified as affiliated with financial industry or not).
\170\ See AAJ Letter, Estell Letter, and NASAA October Letter.
\171\ See, e.g., Nicinski Letter (recommending that arbitrators
be required to display some knowledge of the investment products
likely to be discussed during an arbitration) and Berthel Letter
(recommending (1) that every panel include arbitrators with a strong
background in securities laws and (2) that the Chair be a judge or
hold a law degree).
---------------------------------------------------------------------------
As discussed above, FINRA stated that it has engaged in a robust
review process, including consultation with its NAMC, interested
groups, and other forum constituents, during which it encouraged
interested persons to raise their concerns about the definitions and to
make suggestions on how to improve them.\172\ FINRA stated that its
NAMC did not recommend that FINRA eliminate the arbitrator
classifications.\173\ In addition, FINRA stated that eliminating the
arbitrator classifications would undermine many of its recent changes
to arbitrator selection rules, notably its all-public panel rule, which
have been positively received by parties. In addition, FINRA stated
that the recommended alternatives were either outside the scope of, or
would cause undue delay to, the proposed rule change.\174\ Accordingly,
FINRA declined to amend the proposed rule change.\175\
---------------------------------------------------------------------------
\172\ See FINRA September Letter and FINRA November Letter.
\173\ See FINRA September Letter and FINRA November Letter; see
also supra note 109.
\174\ See FINRA September Letter.
\175\ See FINRA September Letter and FINRA November Letter.
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IV. Discussion
The Commission has carefully considered the proposed rule change,
the comments received, and FINRA's responses to the comments. Based on
its review of the record, the Commission finds that the proposal is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
association.\176\ In particular, the Commission finds that the proposal
is consistent with section 15A(b)(6) of the Act, which requires, among
other things, that FINRA's rules 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.\177\
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\176\ In approving this proposed rule change, the Commission has
considered the proposed rule change's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\177\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
As stated above, FINRA classifies arbitrators as ``non-public'' or
``public'' based on their professional and personal affiliations.
The proposal would, among other things: (1) Permanently classify as
``non-public arbitrators'' individuals with certain affiliations with
the financial industry; and (2) classify as non-public arbitrators
certain professionals (e.g., accountants and attorneys) who represent
or provide services to parties in disputes concerning investment
accounts or transactions, or employment relationships within the
financial industry.\178\ Consequently, the proposed rule change would,
in some instances, require the reclassification of current public
arbitrators to non-public arbitrators.
---------------------------------------------------------------------------
\178\ See infra pp. 41-42 for a discussion of other provisions
of the proposed rule change.
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As stated in the Notice of Filing, the proposed rule change was
designed to address concerns regarding the perceived neutrality of the
public arbitrator roster raised by both investor representatives and
financial industry representatives.\179\ Specifically, the
classification of individuals affiliated with the financial industry as
non-public arbitrators responds to concerns of potential bias of
arbitrators, whether actual or perceived, in favor of the
industry.\180\ Similarly, the classification of Investor Advocates as
non-public arbitrators responds to concerns of potential bias of
arbitrators, whether actual or perceived, in favor of investors.\181\
---------------------------------------------------------------------------
\179\ See Notice of Filing, 79 FR 38080, 38081 (Jul. 3, 2014).
\180\ See SIFMA November Letter and CSLC Letter; see also SIFMA
July Letter, Aidikoff Letter, Bakhtiari July Letter, NASAA July
Letter, and PIABA Letter.
\181\ See SIFMA November Letter and AIG Letter; see also SIFMA
July Letter, FSI Letter, Berthel Letter, and Type A Form Letters;
but see Friedman October Letter, UMIRC Letter, GSU Letter, CSLC
Letter, NASAA November Letter, Second PIRC November Letter, NASAA
July Letter, PIABA Letter, Stephens Letter, PIRC July Letter, Bacine
Letter, Mass Letter, Hardiman Letter, and Friedman July Letter.
---------------------------------------------------------------------------
The Commission believes that the proposed rule change would help to
address any perceived bias of public arbitrators by classifying certain
individuals with either financial industry experience or significant
experience representing investors as non-public arbitrators.
Accordingly, the
[[Page 11705]]
Commission also believes that the proposal would enhance the perception
of neutrality of the entire FINRA arbitration forum. The Commission
recognizes commenters' concerns that classifying Investor Advocates as
non-public investors may be inconsistent with their historic view of
non-public and public arbitrators (i.e., classifying public arbitrators
and non-public arbitrators based on their affiliations (or lack
thereof) with the financial industry).\182\ The Commission also
recognizes, however, that the public interest would be served by
addressing concerns of fairness and neutrality for all forum
users.\183\
---------------------------------------------------------------------------
\182\ See, e.g., CSLC Letter, NASAA November Letter, NASAA July
Letter, PIABA Letter, Stephens Letter, PIRC July Letter, Bacine
Letter, Friedman July Letter, Hardiman Letter, and Mass Letter.
\183\ See FINRA September Letter, FINRA November Letter, and
FINRA December Letter.
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The Commission also recognizes the concerns of some commenters that
the proposed rule change would require FINRA to reclassify some current
public arbitrators as non-public arbitrators and that these
reclassifications may temporarily reduce the number and quality of the
public arbitrator pool, particularly in light of the implementation of
FINRA's all-public-panel rules.\184\ The Commission, however, also
recognizes FINRA's current and proposed future efforts to help ensure
the sufficiency of the public arbitrator pool.\185\
---------------------------------------------------------------------------
\184\ See, e.g., Bender Letter, PIRC First November Letter, GSU
Letter, SAC October Letter, SAC July Letter, and NASAA July Letter.
\185\ See FINRA November Letter and FINRA December Letter.
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Although FINRA stated that it currently anticipates having a
sufficient number of public arbitrators to serve the immediate needs of
forum users, it also acknowledged that the proposal may necessitate
aggressive arbitrator recruitment.\186\ Accordingly, FINRA stated that
it is committed to help ensure that the forum has a sufficient number
of public arbitrators to serve the needs of its forum members in each
of its hearing locations.\187\ For example, FINRA stated that it
intends to conduct a detailed survey of its public arbitrators as part
of an impact analysis to assist in allocating its resources to recruit
public arbitrators in the areas most needed.\188\ In addition, FINRA
stated that it intends to devote its resources to recruiting
arbitrators.\189\
---------------------------------------------------------------------------
\186\ See FINRA November Letter and FINRA December Letter.
\187\ See FINRA November Letter and FINRA December Letter.
\188\ See FINRA September Letter and FINRA December Letter.
\189\ See FINRA November Letter and FINRA December Letter.
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Furthermore, FINRA stated that it has taken steps to enhance
arbitrator retention. For example, FINRA stated that it has implemented
a new rule to increase the amount of honoraria paid to its
arbitrators.\190\ In addition, FINRA stated that it intends to increase
the amount of honoraria paid to arbitrators when a party or parties
postpone or cancel hearing sessions on short notice.\191\
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\190\ See supra note 125.
\191\ See, e.g., FINRA December Letter; see also Exchange Act
Release No. 74289 (Feb. 18, 2015), 80 FR 9773 (Feb. 24, 2015)
(Notice of Filing of a Proposed Rule Change to Amend the Codes of
Arbitration Procedure to Increase the Late Cancellation Fee) (FINRA
proposed rule change to amend Rules 12214 and 12601 of the Customer
Code and Rules 13214 and 13601 of the Industry Code to require,
among other things, that parties give more advance notice before
cancelling or postponing a hearing, or be assessed a higher late
cancellation fee if such notice is not provided).
---------------------------------------------------------------------------
While FINRA acknowledges that the proposed rule change will
necessitate aggressive arbitrator recruitment to help ensure that its
arbitration forum will continue to have sufficient public arbitrators
to prevent delays in all hearing locations,\192\ the Commission
preliminarily believes that FINRA's plan to mitigate such delays is
appropriate, particularly in light of the primary objective of the
proposal--improving the perceived neutrality of its arbitrators and
integrity of its arbitration forum.
---------------------------------------------------------------------------
\192\ See FINRA November Letter.
---------------------------------------------------------------------------
In sum, the Commission believes that the proposed rule change would
help address forum users' perceptions of neutrality in, and maintain
the integrity of, the arbitration forum. In addition, the Commission
believes the potential negative effects (in particular, a temporary
decline in the number of available public arbitrators) will be
mitigated by FINRA's proposed recruitment and retention of public
arbitrators.
The proposed rule change would also: (1) Extend the cooling off
period for Industry Affiliates and Investor Advocates to five years,
and (2) use professional time to quantify professional work when
determining whether a person qualifies as an Industry Affiliate or
Investor Advocate. Although some commenters suggested alternatives,
such as proportional cooling off periods or using revenue, instead of
professional time, to quantify professional work, FINRA stated its
belief that a bright-line test is more workable and eases
administrative burdens while addressing concerns about potential or
perceived bias in the forum.
In addition to the amendments discussed above, the proposed rule
change would make several additional changes to the Codes. For
instance, the proposal would (1) add new categories of financial
industry personnel who would be classified as non-public arbitrators,
in particular persons associated with, including registered through, a
mutual fund or hedge fund and persons associated with, including
registered through, an investment adviser; (2) reduce from 20 to 15,
the number of years a person must work over the course of his or her
career in specified capacities in order to be permanently classified as
a non-public arbitrator; and (3) redefine the definition of ``immediate
family member'' as well as add a two year cooling off period for
individuals whose immediate family members engage in specified
activities that disqualify them from serving on the public arbitrator
roster.
The Commission also recognizes some of the other concerns raised by
commenters regarding the process FINRA used for proposing this rule.
Some commenters expressed concern that FINRA did not perform a cost-
benefit analysis prior to proposing the rule change.\193\ Other
commenters recommended that FINRA submit the proposal to its
Arbitration Task Force prior to proposing it.\194\ In response, FINRA
identified the process it took in developing and considering the
proposal, including consultation with its NAMC, interested groups, and
other forum users; stated that additional consideration by the
Arbitration Task Force is not precluded; and stated its intent to
perform future cost-benefit analysis to prevent burdening its
arbitrators prior to the effectiveness of the proposed new rule.\195\
In sum, the Commission believes that FINRA gave due consideration to
the proposal and met the requirements of the Exchange Act. However, the
Commission will be interested in the results of FINRA's future cost-
benefit analysis and the staff will monitor the consequences of
approval of the proposed rule change.
---------------------------------------------------------------------------
\193\ See Friedman October Letter, PIRC First November Letter,
and SAC October Letter; see also SAC July Letter and Friedman July
Letter.
\194\ See Friedman October Letter and SAC October Letter; see
also Friedman July Letter.
\195\ See FINRA September Letter, FINRA November Letter, and
FINRA December Letter.
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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 11706]]
V. Conclusion
It is therefore ordered pursuant to section 19(b)(2) of the Act
\196\ that the proposed rule change (SR-FINRA-2014-028) be and hereby
is approved.
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\196\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\197\
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\197\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-04419 Filed 3-3-15; 8:45 am]
BILLING CODE 8011-01-P