
[Federal Register Volume 76, Number 71 (Wednesday, April 13, 2011)]
[Notices]
[Pages 20741-20742]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-8897]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64226; File No. SR-FINRA-2011-005]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of a Proposed Rule Change 
Relating to Promissory Note Proceedings

April 7, 2011.

I. Introduction

    On February 4, 2011, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``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 13806 of the Code of Arbitration 
Procedure for Industry Disputes (``Industry Code'') to provide that 
FINRA will appoint a chair-qualified public arbitrator also qualified 
to resolve statutory discrimination cases. The proposed rule change was 
published for comment in the Federal Register on February 22, 2011.\3\ 
The Commission did not receive any comments on the proposal. This order 
approves the proposed change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities and Exchange Act Release No. 63909 (February 
15, 2011), 76 FR 9838 (February 22, 2011) (``Notice'').
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II. Description of the Proposal

    In 2009, FINRA implemented new procedures to expedite the 
administration of cases that solely involve a broker-dealer's claim 
that an associated person failed to pay money owed on a promissory 
note.\4\ Under these procedures, FINRA appoints a single chair-
qualified public arbitrator from the roster of arbitrators approved to 
hear statutory discrimination claims (a statutory discrimination 
qualified arbitrator) \5\ to resolve the dispute.\6\ These specially 
qualified arbitrators are public chair-qualified arbitrators who also 
are attorneys familiar with employment law and have at least ten years 
of legal experience. In addition, they may not have represented 
primarily the views of employers or of employees within the last five 
years. FINRA proposed using statutory discrimination qualified 
arbitrators because of the depth of their experience and their 
familiarity with employment law. At the time that FINRA filed the 
proposed rule change, these arbitrators were underutilized at the 
forum.
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    \4\ See Securities Exchange Act Rel. No. 60132 (June 17, 2009), 
74 FR 30191 (June 24, 2009) (File No. SR-FINRA-2009-015). FINRA 
announced implementation of New Rule 13806 (Promissory Note 
Proceedings) in Regulatory Notice 09-48 (August 2009). The effective 
date was September 14, 2009.
    \5\ See Rule 13802(c)(3).
    \6\ Under Rule 13806, if an associated person does not file an 
answer, or files an answer but does not assert any counterclaims or 
third party claims, regardless of the amount in dispute, a single 
statutory discrimination qualified arbitrator decides the case. If 
an associated person files a counterclaim or third party claim, 
FINRA bases panel composition on the amount of the counterclaim or 
third party claim. For counterclaims and third party claims that are 
not more than $100,000, FINRA appoints a single statutory 
discrimination qualified arbitrator. For counterclaims and third 
party claims of more than $100,000, FINRA appoints a three-
arbitrator panel comprised of a statutory discrimination qualified 
arbitrator, a public arbitrator, and a non-public arbitrator.
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    Since implementing the new procedures, FINRA has found that 
promissory note cases do not require extensive experience or depth of 
knowledge (or the limitation on representation of employers or of 
employees within the last five years). In a majority of completed 
cases, arbitrators decided the case on the pleadings and the respondent 
broker did not appear.\7\ Experience with the new procedures led FINRA 
to propose amending the Industry Code to provide that FINRA will 
appoint a chair-qualified public arbitrator to a panel resolving a 
promissory note dispute instead of appointing a statutory 
discrimination qualified arbitrator. Chair-qualified arbitrators have 
completed chair training and are attorneys who have served through 
award on at least two cases, or, if not attorneys, are arbitrators who 
have served through award on at least three cases.\8\
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    \7\ Of the first 175 promissory note cases completed, 
arbitrators decided the case on the pleadings 76 percent of the time 
(unless the case concluded by settlement or some other means).
    \8\ See Rule 12400(c).
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    In addition, the number of promissory note cases has more than 
doubled in the past two years. As a result of this substantial 
increase, it is becoming more difficult to appoint panels solely with 
statutory discrimination qualified arbitrators to these cases. Under 
the proposed rule change, the number of arbitrators available for 
appointment in promissory note cases would increase significantly. The 
proposed rule change would ensure that FINRA has a sufficient number of 
qualified arbitrators readily available to resolve these matters.
    As explained in the Notice, FINRA believes that the proposed rule 
change is consistent with the provisions of Section 15A(b)(6) of the 
Act,\9\ 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. FINRA believes that the 
proposed rule change is consistent with the provisions of the Act noted 
above because it would ensure that FINRA has a sufficient number of 
qualified arbitrators readily available to resolve promissory note 
cases.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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III. Discussion of Comment Letters

    The Commission did not receive any comment letters regarding the 
proposed rule change.

IV. Commission Findings

    The Commission has carefully reviewed the proposed rule change and 
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.\10\ In particular, the Commission 
finds that the proposed rule change is consistent with Section 
15A(b)(6) of the Act,\11\ 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. More 
specifically, the Commission finds that the proposed rule change to 
allow chair-qualified arbitrators to hear promissory note cases would 
help to ensure that there are sufficient number of qualified 
arbitrators readily available to resolve such cases.
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    \10\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78o-3(b)(6).

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[[Page 20742]]

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-FINRA-2011-005), be, and 
hereby is, approved.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8897 Filed 4-12-11; 8:45 am]
BILLING CODE 8011-01-P


