
[Federal Register: November 2, 2009 (Volume 74, Number 210)]
[Notices]               
[Page 56679-56682]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02no09-90]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60878; No. SR-FINRA-2009-041]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, To Amend Rules 12100, 12506, and 12902 of the 
Code of Arbitration Procedure for Customer Disputes and Rule 13100 of 
the Code of Arbitration Procedure for Industry Disputes To Implement 
Conforming Changes

October 26, 2009.

I. Introduction

    On June 5, 2009, Financial Industry Regulatory Authority, Inc. 
(``FINRA'' or the ``Corporation'') (f/k/a National Association of 
Securities Dealers, Inc. (``NASD'')) filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission''), pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'' or 
``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend Rules 12100(r), 12506(a), and 12902(a) of the Code of Arbitration 
Procedure for Customer Disputes (``Customer Code'') and Rule 13100(r) 
of the Code of Arbitration Procedure for Industry Disputes (``Industry 
Code'') to amend the definition of ``associated person,'' streamline 
case administration procedure, and clarify that customers could be 
assessed hearing session fees based on their own claims for relief in 
connection with an industry claim. The proposed rule change was 
published for comment in the Federal Register on July 2, 2009.\3\ The 
Commission received one comment on the proposed rule change.\4\ On 
August 10, 2009, FINRA responded to the comment letter.\5\ On October 
16, 2009, FINRA filed Amendment No. 1 to the proposed rule change.\6\ 
The Commission is publishing this notice and order to solicit comments 
on Amendment No. 1 and to approve the proposed rule change, as modified 
by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 60159 (June 22, 2009), 
74 FR 31779 (``Notice'').
    \4\ See letter from Brian M. Smiley, Public Investors 
Arbitration Bar Association, to Elizabeth M. Murphy, Secretary, 
Commission, dated July 29, 2009 (``PIABA Letter'').
    \5\ See letter from Mignon McLemore, FINRA Dispute Resolution, 
to Elizabeth M. Murphy, Secretary, Commission, dated August 10, 2009 
(``FINRA Response'').
    \6\ Amendment No. 1 was a partial amendment that made minor 
technical edits to the rule text and the description of the 
proposal, and therefore does not require notice and comment.
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II. Description of Proposed Rule Change

    On January 24, 2007, the SEC approved amendments to the NASD Code 
of Arbitration Procedure (``old Code'') in connection with rules 
applicable to customer disputes and to industry disputes,\7\ a final 
step in the reorganization of the old Code into three separate 
procedural codes: The Customer Code, the Industry Code, and the 
Mediation Code (the ``Code Revision'').\8\ The Code Revision simplified 
the language of the old Code, codified current dispute resolution 
practices, and implemented several substantive changes to dispute 
resolution rules. Since the SEC approved the Code Revision, Dispute 
Resolution staff (``staff'') has found rule language that was omitted 
inadvertently from the Customer Code and the Industry Code 
(collectively, ``Codes''), as well as rule language that could be 
improved to better convey FINRA's

[[Page 56680]]

intent or to clarify current practice regarding certain dispute 
resolution rules. To address these concerns, FINRA proposed to amend:
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    \7\ See Securities Exchange Act Release No. 55158 (January 24, 
2007), 72 FR 4574 (January 31, 2007) (File Nos. SR-NASD-2003-158 and 
SR-NASD-2004-011).
    \8\ The Mediation Code was filed separately with the Commission 
as SR-NASD-2004-013. The Commission approved the Mediation Code on 
October 31, 2005, and it became effective on January 30, 2006. See 
Securities Exchange Act Rel. No. 52705 (October 31, 2005), 70 FR 
67525 (November 7, 2005) (SR-NASD-2004-013).
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     Rules 12100(r) and 13100(r) of the Codes (the definition 
of ``person associated with a member'') so that the definition in the 
Codes conforms to the definition in FINRA's By-Laws;
     Rule 12506(a) of the Customer Code (Document Production 
Lists) to encourage parties to download the Discovery Guide from 
FINRA's Web site instead of having a copy mailed to them automatically 
when a claim is filed; and
     Rule 12902(a) of the Customer Code (Hearing Session Fees, 
and Other Costs and Expenses) to clarify that the arbitrators may 
assess hearing session fees against a customer in connection with a 
claim filed by a member against a customer in cases where there is also 
a responsive customer claim.
    A discussion of the proposed amendments to each rule follows.

Rules 12100(r) and 13100(r)--Person Associated With a Member

    As defined by Rules 12100(r) and 13100(r), a ``person associated 
with a member'' or an ``associated person'' generally is an individual 
who is licensed by FINRA to buy and sell securities for a FINRA member 
and its customers.\9\ This associated person works for a member and, in 
most cases, is the individual with whom customers communicate to 
discuss their accounts or securities transactions.
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    \9\ Rules 12100(r) and 13100(r) define ``person associated with 
a member'' to mean:
    (1) A natural person registered under the Rules of FINRA; or
    (2) A sole proprietor, partner, officer, director, or branch 
manager of a member, or a natural person occupying a similar status 
or performing similar functions, or a natural person engaged in the 
investment banking or securities business who is directly or 
indirectly controlling or controlled by a member, whether or not any 
such person is registered or exempt from registration with FINRA 
under the By-Laws or the Rules of FINRA.
    For purposes of the Code, a person formerly associated with a 
member is a person associated with a member.
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    FINRA stated that it intended the definition of associated person 
in the Codes to match the By-Laws definition,\10\ except for one phrase 
relating only to Procedural Rule 8210. To that end, FINRA proposed to 
amend Rules 12100(r) and 13100(r) of the Codes to make these 
definitions consistent with the definition in FINRA's By-Laws. The 
proposal would amend the definition of ``person associated with a 
member'' in the Codes to: (1) Insert the word ``other'' before the 
second reference to ``natural person'' to clarify that the definition 
does not include corporate entities; and (2) insert the criterion that 
a natural person includes someone who has applied for registration.
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    \10\ FINRA's By-Laws define ``person associated with a member or 
associated person of a member'' as:
     (1) A natural person who is registered or has applied for 
registration under the Rules of the Corporation; (2) a sole 
proprietor, partner, officer, director, or branch manager of a 
member, or other natural person occupying a similar status or 
performing similar functions, or a natural person engaged in the 
investment banking or securities business who is directly or 
indirectly controlling or controlled by a member, whether or not any 
such person is registered or exempt from registration with the 
Corporation under these By-Laws or the Rules of the Corporation; and 
(3) for purposes of Rule 8210, any other person listed in Schedule A 
of Form BD of a member.
    See By-Laws of the Corporation, Article I, Definitions (rr).
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    FINRA stated that it believes that amending the definition in Rules 
12100(r) and 13100(r) to clearly exclude corporate entities from the 
definition of associated person would remove any ambiguity concerning 
how the definition will be applied. Further, amending these rules to 
expand the forum's jurisdiction to natural persons who have applied for 
registration would ensure that these individuals, who may be working in 
some capacity with a firm while awaiting their license, are subject to 
FINRA's rules, and hence would be required to arbitrate should a 
dispute involving them arise. Moreover, FINRA noted that this amendment 
would conform the definitions under the Codes to the Corporation's 
definition of person associated with a member.\11\
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    \11\ See supra note 10.
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Rule 12506--Document Production Lists

    During the arbitration process, parties can request discovery of 
documents, names of witnesses, and other information from each other to 
prepare their cases for the arbitration hearing. To help parties 
understand what information they should disclose, FINRA staff provides 
a copy of the FINRA Discovery Guide \12\ to parties when the Director 
serves the statement of claim. The Discovery Guide provides parties in 
customer cases with guidance on which documents they should exchange 
without arbitrator or staff intervention (called Document Production 
Lists)\13\ and provides guidance to arbitrators in determining which 
documents parties are presumptively required to produce.\14\
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    \12\ In January 1996, FINRA (then-NASD) created a Discovery 
Guide to assist customers in an arbitration with directing discovery 
and resolving discovery disputes. The Discovery Guide was approved 
by the SEC after a public comment period, see Securities Exchange 
Act Release No. 41833 (September 2, 1999), 64 FR 49256 (September 
10, 1999). and was made available for use in arbitration proceedings 
involving customer disputes upon the publication of Notice to 
Members 99-90 (November 1999).
    \13\ Many of the provisions of the Discovery Guide were 
incorporated into the Codes as part of the Code Revision. See supra 
note 7.
    \14\ Although there are discovery rules in each Code, the 
Discovery Guide applies only in customer arbitration disputes.
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    Rule 12506 of the Customer Code states that when the Director 
serves the statement of claim, ``the Director will provide the FINRA 
Discovery Guide and Document Production Lists to the parties.'' In 
light of the availability of Dispute Resolution forms, guides and the 
claim filing system on FINRA's Web site, FINRA stated that it believes 
that it is no longer necessary to disseminate the Discovery Guide to 
parties automatically when they file a claim in the dispute resolution 
forum. Further, many parties and counsel who use FINRA's arbitration 
forum are repeat users who are likely to have a current copy of the 
Discovery Guide in their files. Due to these circumstances, FINRA 
believes that automatic distribution of the Discovery Guide is not an 
efficient use of resources.
    Therefore, FINRA proposed to amend Rule 12506(a) to state that, 
when the Director serves the statement of claim, the Director will 
notify parties of the location of the Discovery Guide (which includes 
the Document Production Lists) on FINRA's Web site, but will not 
provide a copy except upon request. FINRA stated that it believes the 
proposed change would enhance the efficiency of the case administration 
process, and would reduce FINRA's printing and mailing costs. Moreover, 
FINRA stated that the proposal would encourage parties, especially 
those who frequently use the forum, to download relevant information 
from FINRA's Web site as needed.

Rule 12902--Hearing Session Fees, and Other Costs and Expenses

    Under the old Code, arbitrators could allocate hearing session fees 
against any party. Rule 10332(c) \15\ of the old Code protected 
customers from potentially higher forum fees (now hearing session fees) 
triggered by amounts sought in industry claims by prohibiting the 
arbitrators from assessing forum fees against customers if the industry 
claim was dismissed. Moreover, the rule protected customers from higher 
forum fees by requiring the amount of the

[[Page 56681]]

forum fees to be based on the amount awarded to an industry party and 
not on the amount of damages requested by the industry claim. However, 
Rule 10332(c) also provided that customers could be fairly subject to 
potential forum fees based on their own claims for relief in connection 
with the industry claim.\16\
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    \15\ Rule 10332(c) of the old Code stated, in relevant part, 
that ``no fees shall be assessed against a customer in connection 
with an industry claim that is dismissed; however, in cases where 
there is also a customer claim, the customer may be assessed forum 
fees based on the customer claim.''
    \16\ For example, if a member filed a claim against a customer, 
and the arbitrators dismissed the claim, the customer would not be 
assessed any forum fees. However, if, in connection with the 
industry claim, the customer filed a counterclaim against the 
member, the customer would be subject to potential forum fees based 
on the customer's own claim for relief.
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    During the Code Revision, FINRA inadvertently omitted from the 
corresponding provision, Rule 12902(a)(4) of the Customer Code, the 
provision in old Rule 10332(c) that permitted the forum to assess fees 
against the customer based on the customer's claim in an industry 
dispute. Thus, FINRA proposed to amend Rule 12902(a)(4) to incorporate 
the omitted language at the end of the rule to state specifically that 
``in cases where there is also a customer claim, the customer may be 
assessed a filing fee under Rule 12900(a), and may be subject to 
hearing session fees.''
    FINRA noted that the proposed amendment does not reflect a change 
in FINRA's stated policy or practice. Under the Customer Code, if a 
customer files a claim, counterclaim, cross claim or third party claim, 
Rule 12900(a)(1) requires the customer to pay a filing fee. Moreover, 
the first sentence of Rule 12902(a)(4) addresses the instance in which 
a customer may be assessed hearing session fees in connection with a 
claim filed by a member or associated person.\17\ Similarly, the 
proposed amendment to Rule 12902(a)(4) would make clear to customers 
that if they file a claim in connection with a claim filed by a member, 
they may be subject to filing fees and hearing session fees based on 
their own claim for relief.\18\ FINRA stated that it believes the 
proposed amendment would clarify the forum's policy concerning fees in 
connection with a customer counterclaim for relief and make the Code 
easier to administer for staff.
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    \17\ Rule 12902(a)(4) maintains the protection of old Rule 
10332(c) by requiring that ``the amount of hearing session fees the 
customer must pay must be based on the amount actually awarded to 
the member or associated person, rather than on the amount claimed 
by the member or associated person.''
    \18\ Rule 12900(a)(1) provides, in part, that:
    Customers, associated persons, and other non-members who file a 
claim, counterclaim, cross claim or third party claim must pay a 
filing fee * * *. The Director may defer payment of all or part of 
the filing fee on a showing of financial hardship.
    FINRA staff explained that the reference to Rule 12900(a) was 
intended to assist customers, and that the language of Rule 
12902(a)(4) coupled with the reference to Rule 12900(a) should 
communicate the requirement that in industry cases in which there is 
also a customer claim, the customer will be assessed a filing fee, 
the payment of which may be deferred in whole or part upon a showing 
of financial hardship. Telephone call between Kenneth Andrichik and 
Mignon McLemore, FINRA Dispute Resolution, and Paula Jenson and 
Joanne Rutkowski, Division of Trading and Markets, Commission, 
September 17, 2009.
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III. Summary of Comments and Amendment No. 1

    The Commission received one comment in response to the proposed 
rule change.\19\ The commenter supported the proposed amendments to 
Rules 12100(r) and 13100(r), and noted that the changes would help to 
clarify which disputes are subject to FINRA's jurisdiction. The 
commenter also supported the proposed amendment to Rule 12506(a), which 
would encourage parties to download the Discovery Guide from the FINRA 
Web site.\20\
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    \19\ PIABA Letter.
    \20\ The commenter suggested that FINRA continue to make parties 
and their attorneys aware of the Discovery Guide, and to provide a 
copy of the Discovery Guide to a party upon request. In response, 
FINRA noted that, when a claim is filed in its arbitration forum, 
staff sends a letter to the parties notifying them of case 
administration procedures and other information. If the proposed 
rule change is approved, FINRA will include in the letter a link to 
the Discovery Guide on FINRA's Web site. The proposed change to Rule 
12506(a) states that ``the director will notify parties of the 
location of the FINRA Discovery Guide and Document Production Lists 
on FINRA's Web site, but will provide a copy to the parties upon 
request.''
    The commenter also asked FINRA to ensure the version of the 
Discovery Guide that is posted ``is actually the version that was 
disseminated by way of Notice to Members 99-90.'' PIABA Letter. In 
response, FINRA explained that there are two versions of the 
Discovery Guide, one for claims filed prior to April 16, 2007, and 
one for claims filed thereafter. Both are published on the FINRA Web 
site, and each is conspicuously labeled with the relevant date of 
applicability. FINRA stated that the 1999 version of the Discovery 
Guide was re-formatted and re-designed in March 2003 but 
substantively is the same document that was the subject of Notice to 
Members 99-90. FINRA Response.
    Finally, the commenter opposed the proposed change to Rule 12902 
because the ``new language could discourage customers from filing 
counterclaims.'' PIABA Letter. In response, FINRA explained that the 
proposed amendment does not represent a new fee to be imposed on 
customers. Rule 12902(a)(4) still restricts the hearing session fees 
that arbitrators may assess against customers in claims brought by 
member firms. If a customer files a claim, counterclaim, cross claim 
or third party claim, Rule 12900(a)(1) requires customers to pay a 
filing fee, and if that claim is heard by an arbitrator or 
arbitrators, Rule 12902(a)(4) contemplates that hearing session fees 
may be allocated against the customer. FINRA stated that the 
proposed amendment to Rule 12902(a)(4) reflects current practice and 
is intended to clarify that if customers file a claim in connection 
with a claim filed by a member, the customers may be subject to 
filing fees and hearing session fees based on their own claim for 
relief. FINRA Response.
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    In Amendment No. 1, FINRA proposed a limited amendment to the 
proposed amendment of Rule 12902 to remove a potentially confusing 
internal reference.

IV. Discussion and Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\21\ In particular, the Commission finds that the proposed 
rule change is consistent with the provisions of Section 15A(b)(6) of 
the Act,\22\ which requires, among other things, that the Association's 
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 would ensure that individuals who have applied for 
registration are bound by FINRA's rules, and therefore subject to the 
jurisdiction of the dispute resolution forum. It would also assist in 
the efficient administration of the arbitration process by streamlining 
certain procedures and clarifying the allocation of hearing fees.
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    \21\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78o-3(b)(6).
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V. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\23\ for approving the proposed rule change, as amended by 
Amendment No. 2 thereto, prior to the 30th day after the date of 
publication in the Federal Register. The changes proposed in Amendment 
No. 1 are minor and technical in nature. Accordingly, the Commission 
finds that good cause exists to approve the proposal, as modified by 
Amendment No. 1, on an accelerated basis.
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    \23\ 15 U.S.C. 78o-3(b)(5).
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VI. 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

[[Page 56682]]

Number SR-FINRA-2009-041 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-2009-041. 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 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-2009-041 and 
should be submitted on or before November 23, 2009.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-FINRA-2009-041), as amended, 
be, and hereby is, approved on an accelerated basis.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-26254 Filed 10-30-09; 8:45 am]

BILLING CODE 8011-01-P
