
[Federal Register Volume 75, Number 140 (Thursday, July 22, 2010)]
[Notices]
[Pages 42795-42797]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-17931]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62521; File No. SR-FINRA-2010-006]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule 
Change and Order Granting Accelerated Approval to a Proposed Rule 
Change, as Modified by Amendment No. 1, To Amend the Codes of 
Arbitration Procedure To Provide for Attorney Representation of Non-
Party Witnesses in Arbitration

July 16, 2010.

I. Introduction

    On January 22, 2010, the 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''), 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 Rule 12602 of the Code 
of Arbitration Procedure for Customer Disputes (``Customer Code'') and 
Rule 13602 of the Code of Arbitration Procedure for Industry Disputes 
(``Industry Code'') (collectively, the ``Codes'') to provide that a 
non-party witness may be represented by an attorney at an arbitration 
hearing while the witness is testifying. The proposed rule change was 
published for comment in the Federal Register on February 23, 2010.\3\ 
The Commission received three comments in response to the proposed rule 
change.\4\ FINRA responded to the comments and on June 14, 2010 filed 
Amendment No. 1 to the proposed rule change.\5\ 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\ See Securities Exchange Act Release No. 61517 (February 16, 
2010), 75 FR 8169 (February 23, 2010), (SR-FINRA-2010-006) 
(``Notice'').
    \4\ See letter from William A. Jacobson, Director, Cornell 
Securities Law Clinic and Rubina Ali, Cornell Law School, dated 
March 16, 2010 (``Cornell Letter''), letter from Richard P. Ryder, 
dated April 16, 2010 (``Ryder Letter'') and letter from Scott R. 
Shewan, President, Public Investors Arbitration Bar Association, 
dated April 28, 2010 (``PIABA Letter''). The Ryder Letter and the 
PIABA Letter were submitted several weeks after the expiration of 
the comment period.
    \5\ See Amendment No. 1 dated June 14, 2010 (``Amendment No. 
1''). The text of Amendment No. 1 is available on FINRA's Web site 
at http:www.finra.org, at the principal office of FINRA, and on the 
Commission's Internet Web site ( http://www.sec.gov.rules.sro.html).
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II. Description of the Proposed Rule Change

    FINRA proposed to amend Rules 12602 and 13602 of the Codes to 
provide that a non-party witness has the right to be represented by an 
attorney at an arbitration proceeding held in a United States hearing 
location while the witness is testifying. The attorney would have to be 
in good standing and admitted to practice before the Supreme Court of 
the United States or the highest court of any state of the United 
States, the District of Columbia, or any commonwealth, territory, or 
possession of the United States, unless state law prohibits such 
representation. Under the proposal, the panel would have the authority 
to determine the extent to which the attorney could participate at the 
hearing.
    While the Codes expressly allow a party in an arbitration 
proceeding to be represented by an attorney at any stage in the 
proceeding,\6\ they do not address attorney representation of a non-
party witness. As stated in the notice, FINRA

[[Page 42796]]

believes that a non-party witness should be entitled to representation 
by an attorney while he or she is testifying. Currently, under the 
Codes, the arbitration panel determines whether a non-party witness' 
attorney may attend a hearing.\7\ A non-party witness may testify at a 
hearing: (1) Voluntarily; (2) pursuant to a subpoena; \8\ or (3) in 
compliance with an arbitrator's order for an associated person to 
appear and give testimony.\9\
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    \6\ Rules 12208 and 13208 of the Codes (Representation of 
Parties) provide that parties have the right to be represented by an 
attorney at any stage in an arbitration proceeding. They also allow 
parties to be represented by a person who is not an attorney subject 
to certain limitations.
    \7\ Rules 12602 and 13602 of the Codes (Attendance at Hearings) 
provide that parties and their representatives are entitled to 
attend all hearings and that, absent persuasive reasons to the 
contrary, expert witnesses should also be permitted to attend all 
hearings. The panel determines who else may attend any or all 
hearings.
    \8\ Rules 12512 and 13512 of the Codes (Subpoenas) provide that 
arbitrators have the authority to issue subpoenas for the production 
of documents or the appearance of witnesses. The rules permit a 
party to make a written motion requesting that an arbitrator issue a 
subpoena to a party or a non-party.
    \9\ Rules 12513 and 13513 of the Codes (Authority of Panel to 
Direct Appearances of Associated Person Witnesses and Production of 
Documents Without Subpoenas) provide that the panel may order the 
appearance of any employee or associated person of a FINRA member.
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    Under the current Codes, arbitrators determine whether non-party 
witnesses can bring an attorney to a hearing. As indicated in the 
Notice, FINRA does not believe that arbitrators have been denying 
requests by non-party witnesses, including non-party associated 
persons,\10\ to be represented by attorneys while testifying; 
nevertheless, to assure due process in its dispute resolution forum, 
FINRA believes that the Codes should expressly provide that a non-party 
witness is entitled to be represented by an attorney while testifying.
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    \10\ The proposed rule change would apply to all non-party 
witnesses testifying at a FINRA arbitration hearing, including an 
associated person who handled the customer claimant's account but 
was not named as a respondent in the case.
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III. Summary of Comment Letters and FINRA's Response

    The Commission received three comments on the proposed rule 
change.\11\ Two commenters suggested revisions to the proposed rule 
change.\12\ The other commenter generally opposed the proposal and 
urged FINRA to withdraw it.\13\ The Commission also received FINRA's 
response to comments, which is discussed below.\14\
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    \11\ See note 4, supra.
    \12\ Cornell Letter; PIABA Letter. The Cornell Letter expressed 
support for the proposed rule change subject to modification. The 
PIABA Letter indicated that it did not support the proposed rule in 
its current form.
    \13\ Ryder Letter.
    \14\ Letter from Margo A. Hassan, FINRA, dated April 1, 2010 
(addressing the Cornell Letter) (``FINRA Letter I''). Because the 
Ryder and PIABA Letters were submitted after the expiration of the 
comment period, FINRA responded to these comments in a separate 
letter. See letter from Margo Hassan, FINRA, dated June 14, 2010 
(``FINRA Letter II'') (collectively with FINRA Letter I, ``FINRA's 
Response'').
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    One commenter supported FINRA's efforts to consider due process 
protections for non-party witnesses.\15\ However, the commenter also 
expressed concern that unless FINRA adopts guidelines for arbitrators, 
the arbitration process could be impeded by attorneys for non-party 
witnesses using scheduling conflicts to delay an arbitration or 
``overstepping'' their role with inappropriate objections not 
necessarily tied to their clients' testimony. This commenter suggested 
amending the proposal to limit the role of a non-party witness' 
attorney, absent extraordinary circumstances, to matters concerning 
privilege and conflicts arising under Fifth Amendment protections 
against self-incrimination.\16\
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    \15\ Cornell Letter.
    \16\ Id. The commenter also indicated that attorneys for non-
party witnesses should not be able to participate generally in the 
proceedings or cross-examine witnesses.
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    Another commenter did not support the proposal and suggested an 
amending it to limit the role of a non-party witness' attorney.\17\ 
Specifically, this commenter suggested that attorneys for non-party 
witnesses should not be permitted to participate in an arbitration 
hearing or advocate on behalf of any particular party (e.g., 
interjecting argument in the case or offering input or assistance to 
counsel for any other party) other than to raise an objection on behalf 
of a non-party witnesses based on privileges that have been well-
accepted at the federal and state court level.\18\
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    \17\ PIABA Letter
    \18\ The commenter listed the following non-exclusive privileges 
from state and federal courts: attorney-client privilege, work 
product doctrine, spousal privilege, clergy privilege and 
accountant-client privilege. See PIABA Letter.
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    The third commenter did not support the proposal stating that: (1) 
The proposal is unnecessary because arbitrators have apparently not 
been denying requests for representation from non-party witnesses; (2) 
FINRA's references to ``due process'' are inappropriate because 
arbitration proceedings are not designed to be structured as judicial 
proceedings; (3) the proposal would reduce control by arbitrators, add 
confusion and protract the process (e.g., by adding time for developing 
bar qualifications for eligibility of counsel to participate in each 
respective arbitration forum); and (4) FINRA has not adequately 
justified its basis for the proposal.\19\
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    \19\ Ryder Letter.
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    FINRA submitted Amendment No. 1 in response to comments.\20\ 
Amendment No. 1 generally provides that unless otherwise authorized by 
the arbitration panel, the role of the attorney for a non-party witness 
would be limited to asserting recognized privileges such as the 
attorney-client and work product privileges and the privilege against 
self-incrimination.\21\ FINRA indicated that Amendment No. 1 would 
provide additional guidance to parties and arbitrators about the role 
of a non-party witnesses' attorney while maintaining an arbitrator's 
authority and ability to determine the appropriate level of attorney 
representation at a hearing.\22\ FINRA reiterated that it continually 
reviews the Codes to enhance its case administration processes and 
ensure that its forum is fair to all participants.\23\ In addition, 
FINRA indicated that it strives to improve the Codes before problems 
arise and to this end the proposal would close a gap in the Codes 
relating to non-party witness representation.
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    \20\ FINRA Letter II.
    \21\ Id.
    \22\ FINRA's Response.
    \23\ Id.
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IV. Discussion and Commission Findings

    After carefully considering the proposal, as amended by Amendment 
No. 1, the comments, and FINRA's Response, the Commission finds that 
the proposed rule change is consistent with the requirements of the 
Act, and the rules and regulations thereunder that are applicable to a 
national securities association.\24\ In particular, the Commission 
believes the proposed rule change is consistent with the provisions of 
Section 15A(b)(6) of the Act,\25\ 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 investors and the public 
interest because it would enhance the fairness in the arbitration 
process by clarifying that a non-party witness may be represented by 
counsel during his or her testimony.
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    \24\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 17c(f).
    \25\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that FINRA has adequately addressed the 
concerns raised by the commenters. With respect

[[Page 42797]]

to the concern that the proposal is unnecessary because abuses have not 
been witnessed, the Commission notes that its oversight of the 
securities arbitration process is directed at ensuring that it is fair 
and efficient. The Commission believes that FINRA's proactive approach 
in proposing this rule change is consistent with ensuring a fair and 
efficient arbitration process for all persons involved in arbitration, 
including non-party witnesses.
    Moreover, the Commission believes the concern that the proposal 
would reduce control by arbitrators, add confusion and protract the 
process will be mitigated by Amendment No. 1. Under the proposal, as 
modified by Amendment No. 1, the role of attorneys for non-party 
witnesses will generally be limited to asserting recognized privileges 
on behalf of the non-party witness; however, the arbitration panel will 
maintain overall control over the proceeding, including the ability to 
determine the appropriate level of attorney representation at a 
hearing. Further, FINRA has committed to alerting arbitrators to 
concerns regarding delayed or protracted proceedings.
    Finally, the Commission does not agree that FINRA has not 
adequately justified its basis for the proposal. The Commission 
believes that FINRA's justification of enhancing fairness in the 
arbitration process by ensuring that a non-party witness may be 
represented by counsel during his or her testimony is consistent with 
the requirements of the Act.

V. Accelerated Approval

    The Commission finds goods cause, pursuant to Section 19(b)(2) of 
the Act,\26\ for approving the proposed rule change, as modified by 
Amendment No. 1 thereto, prior to the 30th day after publication of 
Amendment No.1 in the Federal Register. The changes proposed in 
Amendment No.1 respond to specific concerns raised by commenters. In 
particular, Amendment No. 1 proposes to limit the role of a non-party 
witness attorney, unless otherwise authorized by the arbitration panel, 
to the assertion of recognized privileges such as the attorney-client 
and work product privilege and the privilege against self-
incrimination.
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    \26\ 15 U.S.C. 78s(b)(2).
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    Accordingly, the Commission finds that good cause exists to approve 
the proposal, as modified by Amendment No. 1, on an accelerated basis.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether Amendment No. 1 
to 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-2010-006 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-2010-006. 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 Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of such filing also will be 
available for inspection and copying at the principal office of FINRA. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-FINRA-2010-006 
and should be submitted on or before August 12, 2010.

VII. Conclusions

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-FINRA-2010-006), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-17931 Filed 7-21-10; 8:45 am]
BILLING CODE 8010-01-P


