
[Federal Register Volume 74, Number 84 (Monday, May 4, 2009)]
[Notices]
[Pages 20519-20522]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-10172]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59836; File No. SR-FINRA-2009-011]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto To Amend the Panel Composition Rules of the Code of 
Arbitration Procedure for Industry Disputes

April 28, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
Financial Industry Regulatory Authority, Inc. (``FINRA'') (f/k/a 
National Association of Securities Dealers, Inc. (``NASD'')) filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') on 
March 4, 2009 the proposed rule change as described in Items I, II, and 
III below, which Items have been substantially prepared by FINRA. On 
April 7, 2009, FINRA filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces and supersedes the initial filing 
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the Code of Arbitration Procedure for 
Industry Disputes (``Industry Code'') to change the criteria for 
determining the panel composition when the claim involves an associated 
person in industry disputes.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA, and at 
the Commission's Public Reference Room.

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

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in Sections A, 
B,

[[Page 20520]]

and C below, of the most significant aspects of such statements.

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

1. Purpose
    Currently, Rule 13402(a) of the Industry Code requires an all non-
public panel for disputes between members, and for employment disputes 
between or among members and associated persons that relate exclusively 
to employment contracts, promissory notes, or receipt of 
commissions.\4\ In all other disputes between or among members and 
associated persons, Rule 13402(b) requires a majority public panel, 
where one arbitrator would be a non-public arbitrator and two would be 
public arbitrators.\5\
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    \4\ If the panel consists of one arbitrator, the arbitrator will 
be a non-public arbitrator selected from the non-public chairperson 
roster described in Rule 13400(c). See Rule 13402(a).
    \5\ If the panel consists of one arbitrator, the arbitrator will 
be a public arbitrator selected from the chairperson roster 
described in Rule 12400(c) of the Code of Arbitration Procedure for 
Customer Disputes (``Customer Code''). See Rule 13402(b).
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    FINRA is proposing to amend the Industry Code to change the 
criteria for determining panel composition when the claim involves an 
associated person in industry disputes.\6\ Specifically, FINRA is 
proposing to amend Rule 13402 and related rules of the Industry Code 
to:
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    \6\ The proposed changes discussed in this rule filing will not 
apply to claims filed under the Customer Code.
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     Require that the parties receive a majority public panel 
for all industry disputes involving associated persons (excluding 
disputes involving statutory employment discrimination claims which 
require a specialized all public panel); \7\
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    \7\ The proposal would not apply to disputes involving a claim 
of statutory employment discrimination. See Rule 13802.
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     Clarify that in disputes involving only members, parties 
will receive an all non-public panel; and
     Provide that if a party amends its pleadings to add an 
associated person to a previously all member case, parties will receive 
a majority public panel.

Thus, cases involving only members would have an all non-public panel; 
cases involving a member and an associated person (excluding cases 
involving a claim for statutory discrimination) would have a majority 
public panel; and cases involving an associated person with a statutory 
discrimination claim would have a specialized all public panel.\8\ 
Moreover, if a member amends its pleadings to add an associated person, 
the case would receive a majority public panel, and the rules that 
apply to cases between associated persons and members would govern list 
selection and the administration of the arbitration proceeding.
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    \8\ See Rule 13802(c) (panel composition rule for statutory 
employment discrimination claims).
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Employment Disputes Involving Associated Persons
    Currently, in employment disputes between or among members and 
associated persons, FINRA requires that the panel consist of all non-
public arbitrators in cases that arise out of the employment or 
termination of employment of an associated person, and that relate 
exclusively to (1) Employment contracts, (2) promissory notes, or (3) 
receipt of commissions. However, if a party adds a claim that does not 
meet these criteria, the parties receive a majority public panel.
    FINRA is concerned that parties may be manipulating the rules to 
secure what they hope will be a favorable panel, which, in many cases, 
they believe to be a majority public panel. For example, if a party 
files a claim in which the sole cause of action involves an issue of 
compensation, FINRA requires parties to select an all non-public panel. 
However, if a party adds a claim that falls outside of the three causes 
of action described in the preceding paragraph (e.g., adds a cause of 
action involving a tort), then the parties receive a majority public 
panel instead.
    FINRA also finds Rule 13402(a) cumbersome to implement. Because the 
three causes of action under the rule are the only exceptions to the 
requirement for a majority public panel in employment cases, the 
parties will receive a majority public panel if there is any ambiguity 
concerning whether a claim falls outside of the three exceptions. The 
lack of an objective standard for determining panel composition, 
therefore, makes the rule difficult to apply and often requires Dispute 
Resolution staff (``staff'') to interpret the parties' pleadings to 
determine the appropriate panel composition. Underscoring this concern, 
staff regularly receives inquiries from parties questioning whether 
their panel composition is proper under Rule 13402.
    FINRA is proposing, therefore, to amend Rule 13402 of the Industry 
Code to clarify that for all employment disputes between or among 
members and associated persons (except for statutory employment 
discrimination cases), the parties must select a majority public 
panel.\9\ Rule 13402(a) would be amended to delete the title of the 
rule, which contains the exceptions to the majority public panel 
requirement, and replace it with a concise description, which clarifies 
that Rule 13402(a) would apply to disputes involving only members. Rule 
13402(b) would be amended to modify the title of the rule to clarify 
that for all industry disputes involving associated persons (excluding 
disputes involving statutory employment discrimination claims), the 
parties would receive a majority public panel. FINRA is also proposing 
to make similar title changes to Rules 13403(a) and 13403(b), which 
govern generating and sending lists to parties, and to Rules 13406(a) 
and 13406(b), which govern appointment of arbitrators and discretion to 
appoint arbitrators not on the list.
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    \9\ The proposed change would be consistent with the rules and 
procedures of the former New York Stock Exchange (``NYSE'') 
arbitration forum. In the NYSE arbitration forum, cases involving 
associated persons received a majority public panel because the 
rules classified associated persons as non-members, and non-members 
received a majority public panel. See NYSE Rule 607(a)(1).
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    FINRA believes the proposed amendments would establish an objective 
standard for determining panel composition and ensure that panel 
composition is determined by the types of parties involved, and not by 
the types of claims filed (other than claims for employment 
discrimination).
Employment Disputes Involving Only Members
    FINRA is proposing to amend Rule 13402(a) to clarify that, in 
disputes involving only members, the parties will receive an all non-
public panel. FINRA notes that the proposed amendment to Rule 13402(a) 
is consistent with the current rule and its intent, which is that 
disputes involving only members should receive an all non-public panel. 
FINRA believes that simplifying the rule, by amending the title as 
described above, will make the rule easier to apply for staff and 
easier to understand for users of the forum.
Amendments to Pleadings That Add an Associated Person
    Occasionally, in a case that began with an all non-public 
arbitrator panel, a party will amend its pleadings in such a way that a 
majority public panel would be required. For example, this might occur 
when a party added a tort claim to prior claims that fit within the 
three exceptions to the majority public

[[Page 20521]]

panel requirement under Rule 13402(a). Under the proposed amendments, 
this change in panel composition would occur solely in disputes 
involving only members in which an associated person is later added. 
Thus, FINRA is proposing to add a provision to Rule 13402(a) to address 
amended pleadings that add an associated person as a party.
    The proposed rule change would mean that if a member (in a dispute 
involving only members) amends a pleading to add a party who is an 
associated person, the parties will receive a majority public panel. If 
lists of potential arbitrators have not been sent to parties, the 
Neutral List Selection System (NLSS) would generate three lists as 
outlined in Rule 13403(b)(2) of the Industry Code. Specifically, FINRA 
would send a public chairperson list, a public arbitrator list, and a 
non-public arbitrator list. If the panel consists of one 
arbitrator,\10\ NLSS would generate a public chairperson list, and 
FINRA would send this list only to the parties.\11\
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    \10\ In a dispute between members, if the panel consists of one 
arbitrator, the arbitrator will be selected from FINRA's non-public 
chairperson arbitrator roster. See Rule 13402(a).
    \11\ See Rule 13403(b)(1). FINRA has raised the amount in 
controversy that will be heard by a single chair-qualified 
arbitrator to $100,000. The rule became effective on March 30, 
2009.See Securities Exchange Release No. 59340 (February 2, 2009), 
74 FR 6335 (February 6, 2009) (File No. FINRA-2008-047); see also 
Regulatory Notice 09-13.
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    If the lists have been sent to parties but are not yet due, FINRA 
would send two new lists to the parties: a public chairperson list and 
a public arbitrator list as outlined in Rule 13403(b)(2).\12\ The 
parties would keep the non-public chairperson list provided to them as 
described in Rule 13403(a), and would select the non-public arbitrator 
from this list. The arbitrator selected from the public chairperson 
list would be the chairperson of the panel. If the panel consists of 
one arbitrator, FINRA would send only a new public chairperson list to 
the parties.\13\
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    \12\ Pursuant to Rule 13407(a), FINRA will send the list of non-
public arbitrators to the new party, with employment history for the 
past 10 years and other background information for each arbitrator 
listed. The newly added party may rank and strike arbitrators in 
accordance with Rule 13404.
    \13\ See supra note 11.
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    If the ranked lists are due, then the parties may not amend a 
pleading to add a new party until a panel has been selected and the 
panel grants a motion to add the party.\14\ If the panel grants the 
motion to add an associated person, FINRA will retain the non-public 
chairperson from the panel, and remove the remaining non-public 
arbitrators.\15\ The parties would select two public arbitrators from 
new lists that FINRA would send to them in the same manner as if the 
ranked lists are not yet due. The arbitrator selected from the public 
chairperson list would be the chairperson of the panel. If the panel 
consists of one arbitrator and the arbitrator grants a motion to add an 
associated person, the arbitrator would be replaced with a public 
chair-qualified arbitrator that the parties select from a new public 
chairperson list that NLSS would generate.\16\
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    \14\ See Rule 13309(c) of the Industry Code.
    \15\ Pursuant to Rule 13407(b), the newly added party may not 
strike the non-public arbitrator but may challenge the arbitrator 
for cause in accordance with Rule 13410.
    \16\ See supra note 11.
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    FINRA believes that these procedures would be consistent with the 
intent of the proposal to require that a majority public panel be 
selected if a dispute involves associated persons, and would clarify 
that amending a pleading to add an associated person would require a 
change to the panel composition.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\17\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. The proposed rule change is consistent with FINRA's 
statutory obligations under the Act to protect the public interest by 
minimizing the parties' ability to manipulate the panel composition 
rules by filing certain types of claims in industry cases. Moreover, 
FINRA believes that the proposed rule change will protect the public 
interest by simplifying the criteria for panel composition in industry 
disputes, establishing an objective standard for determining panel 
composition, and ensuring that panel composition is determined by the 
types of parties involved, and not by the types of claims filed.
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    \17\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received by FINRA.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2009-011 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2009-011. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than

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those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to the File Number SR-FINRA-2009-011 and 
should be submitted on or before May 26, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-10172 Filed 5-1-09; 8:45 am]
BILLING CODE 8010-01-P


