
[Federal Register Volume 77, Number 7 (Wednesday, January 11, 2012)]
[Notices]
[Pages 1773-1775]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-310]



[[Page 1773]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66109; File No. SR-FINRA-2011-075]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend the 
Code of Arbitration Procedure for Industry Disputes To Preclude 
Collective Action Claims From Being Arbitrated

January 5, 2012.
    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 
on December 22, 2011, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend Rule 13201 of the Code of Arbitration 
Procedure for Industry Disputes (``Industry Code'') to preclude 
collective action claims by employees of FINRA members under the Fair 
Labor Standards Act (FLSA), the Age Discrimination in Employment Act 
(ADEA), or the Equal Pay Act of 1963 (EPA) from being arbitrated under 
the Industry Code.
    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, 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
    Current Rules 12204 of the Code of Arbitration Procedure for 
Customer Disputes (Customer Code) and 13204 of the Industry Code 
(together, class action rules) provide that any claim that is based 
upon the same facts and law, and involves the same defendants as in a 
court-certified class action or a putative class action, shall not be 
arbitrated, unless the party bringing the claim files with FINRA one of 
the following: (1) A copy of a notice filed with the court in which the 
class action is pending that the party will not participate in the 
class action or in any recovery that may result from the class action, 
or has withdrawn from the class according to any conditions set by the 
court; or (2) a notice that the party will not participate in the class 
action or in any recovery that may result from the class action.
    In 1999, FINRA issued an Interpretive Letter (FINRA Letter) stating 
that its class action rules should include collective action claims 
brought under the FLSA \3\ and, therefore, has considered these claims 
ineligible for arbitration in its forum.\4\ Nevertheless, in Hugo Gomez 
et al. v. Brill Securities, Inc. et al., the United States District 
Court for the Southern District of New York found that an FLSA 
collective action is not a class action for purposes of Rule 13204 of 
the Industry Code and, thus, compelled arbitration of the claim in 
FINRA's dispute resolution forum.\5\
---------------------------------------------------------------------------

    \3\ See 29 U.S.C. 201 et seq.
    \4\ See, e.g., FINRA Interpretive Letter to Cliff Palefsky, 
Esq., dated Sept. 21, 1999. The letter is available at http://www.finra.org/Industry/Regulation/Guidance/InterpretiveLetters/P002521 (last visited on June 7, 2011).
    \5\ Hugo Gomez et al. v. Brill Securities, Inc. et al., No. 10 
Civ. 3503, 2010 U.S. Dist. LEXIS 118162 (S.D.N.Y. Nov. 2, 2010).
---------------------------------------------------------------------------

    As the court found that FINRA's interpretation of its class action 
rules did not expressly exclude collective actions from being 
arbitrated in the forum, FINRA is proposing to amend its class action 
rule of the Industry Code to preclude collective action claims under 
the FLSA from being arbitrated in its forum. As a collective action 
claim also may be filed pursuant to the ADEA \6\ or EPA,\7\ FINRA is 
proposing to preclude these claims from being arbitrated as well. The 
Customer Code would not be amended because, for the FLSA, ADEA or EPA 
to apply, there must be an employment relationship between an 
``employer'' and ``employee.'' \8\
---------------------------------------------------------------------------

    \6\ See 29 U.S.C. 621 et seq. The relief provisions of the ADEA 
incorporate Section 16 of the FLSA, which outlines the penalties for 
violations of the statute, and state that the ADEA shall be enforced 
by the ``powers, remedies and procedures'' of the FLSA. See 29 
U.S.C. 626(b).
    \7\ See 29 U.S.C. 206(d). The EPA, which is part of FLSA as 
amended, is administered and enforced by the United States Equal 
Employment Opportunity Commission. The relief provisions of the EPA 
also incorporate Section 16 of the FLSA.
    \8\ See U.S. Department of Labor, ``What does the Fair Labor 
Standards Act require?,'' elaws--Fair Labor Standards Act Advisor, 
available at http://www.dol.gov/elaws/esa/flsa/screen5.asp (last 
visited July 26, 2011).
---------------------------------------------------------------------------

United States District Court Decision
    In Gomez, the plaintiffs, registered representatives formerly 
employed by Brill Securities, Inc. (Brill), filed an FLSA collective 
action claim seeking unpaid overtime compensation on behalf of 
similarly situated former and current Brill stockbrokers. They relied 
on the FINRA Letter, which concludes that FLSA claims should be 
considered ineligible for arbitration in the NASD Regulation (now 
FINRA) forum.\9\ The court found that the FINRA Letter did not, 
however, distinguish between collective and class actions and, 
therefore, did not expressly preclude collective actions from being 
eligible for arbitration at FINRA. The Gomez court was not persuaded by 
the FINRA Letter and concluded that the differences between a class 
action and an FLSA collective action undercut FINRA's position that 
collective actions should be treated like class actions. Based on its 
analysis, the court found that an FLSA collective action is not a class 
action for purposes of Rule 13204, and compelled arbitration of the 
plaintiffs' claims.\10\
---------------------------------------------------------------------------

    \9\ Supra note 4 at 2.
    \10\ Supra note 7. Several courts have agreed with this finding 
when they considered whether an FLSA collective action is arbitrable 
under FINRA rules. See, e.g., Velez v. Ph.D. Capital Corp., No. 10 
Civ. 3735, 2011 U.S. Dist. LEXIS 16678 (S.D.N.Y. Feb. 3, 2011); 
Suschil v. Ameriprise Financial Servs., Inc., No. 07 Civ. 2655, 2008 
U.S. Dist. LEXIS 27903 (N.D. Ohio Apr. 7, 2008); and Chapman v. 
Lehman Bros., Inc., 279 F. Supp. 2d 1286 (S.D. Fla. 2003).
---------------------------------------------------------------------------

Collective Actions Under the FLSA, ADEA, and EPA
    As stated above, under the FLSA, ADEA, and EPA, courts are 
permitted to certify a collective action,\11\ rather than a class 
action, under the Federal Rules

[[Page 1774]]

of Civil Procedure.\12\ One difference between a collective action and 
a class action is that, under the collective action statutes, 
collective action members must affirmatively consent or ``opt-in'' to 
become a member of a collective action to benefit or be bound by the 
judgment. This means that a collective action member will not be bound 
by the case, unless the person affirmatively consents to become a 
member.\13\ This requirement effectively protects the interests of 
absent class members, because a lack of consent to join a collective 
action would not preclude them from pursuing their claims in other 
forums.\14\
---------------------------------------------------------------------------

    \11\ See Hyman v. First Union Corp., 982 F. Supp. 1, 26 (D.D.C. 
1997) (approving two collective actions for (1) former bank 
employees and (2) persons seeking employment, alleging age 
discrimination under the ADEA). See also Schwed v. General Electric 
Co., No. 94-CV-1308, 1997 U.S. Dist. LEXIS 5103 at *10 (N.D.N.Y. 
April 11, 1997) (approving collective action for former employees of 
an industrial power plant alleging age discrimination); Jarvaise et 
al. v. Rand Corporation, Civil Action No. 96-2680, 212 F.R.D. 1 
(D.D.C. 2002) (certifying class of all female Rand employees in 
exempt positions under EPA).
    \12\ Fed. R. Civ. P. 23.
    \13\ Cathy Ventrell-Monsees, Representative and Collective 
Actions Under the ADEA Class Actions in Employment Law: Class Action 
Basics, Aug. 10, 1999, http://www.bna.com/bnabooks/ababna/annual/99/adeaclas.pdf at 1-3.
    \14\ See Saincome v. Truly Nolen of America, Inc., No. 11-CV-
825-JM, 2011 U.S. Dist. LEXIS 85880 (S.D.CA. Aug. 3, 2011) 
(affirming that 29 U.S.C. 216(b) of FLSA permits class members to 
participate in a collective action on an opt-in basis only, thus 
preserving absent parties' rights to proceed with the claim in 
arbitration).
---------------------------------------------------------------------------

Proposed Amendments to Rule 13204
    FINRA is proposing, therefore, to amend Rule 13204 of the Industry 
Code to preclude collective actions from being arbitrated in the forum.
    The current rule would be separated into two sections: Subparagraph 
(a) for class actions, and subparagraph (b) for collective actions. 
Subparagraph (a) would be titled, ``Class Actions,'' and re-numbered. 
Subparagraph (b) would be titled, ``Collective Actions,'' and would 
contain four subparagraphs.
    First, proposed Rule 13204(b)(1) would state that collective action 
claims under the FLSA, the ADEA, or the EPA may not be arbitrated under 
the Code. FINRA believes that, although collective actions are opt in 
actions, once a court grants approval for the collective action to 
proceed under a federal statute, the claims in dispute are administered 
like a class action, and, therefore, should be ineligible for 
arbitration in FINRA's forum. Moreover, FINRA believes that collective 
actions, like class actions, should be handled by the judiciary system, 
which has extensive procedures to manage such claims.
    Second, under proposed Rule 13204(b)(2), any claim that involves 
similarly-situated \15\ plaintiffs against the same defendants, like a 
court-certified collective action or a putative collective action,\16\ 
would not be arbitrated in FINRA's arbitration forum. Thus, if an 
associated person opts in to a collective action, that person could not 
arbitrate the same claims in FINRA's arbitration forum. The proposed 
rule would not prevent an associated person from opting in to a 
collective action in court. However, an associated person would be 
required to choose the forum--either arbitration or court--that the 
person believes would address effectively the issues in dispute. 
Further, under proposed Rule 13204(b)(2), a case in which a court 
orders the plaintiffs to file as a collective action at a forum not 
sponsored by a self-regulatory organization would be ineligible for 
arbitration at FINRA.
---------------------------------------------------------------------------

    \15\ The FLSA uses the term ``similarly-situated,'' but does not 
define it. See 29 U.S.C. 216(b). However, its meaning can be 
understood by considering two criteria that a plaintiff must 
demonstrate under the FLSA: (1) That there are common questions of 
law or fact, and (2) that the claims or defenses are typical of 
those of the class of plaintiffs. See supra note 3.
    \16\ Before a collective action is certified, courts often refer 
to the case as a putative collective action.
---------------------------------------------------------------------------

    Third, proposed Rule 13204(b)(3) would give arbitrators the 
authority to decide disputes about whether a claim is part of a 
collective action. This provision would be consistent with the 
proposed, renumbered class action rule, Rule 13204(a)(3), in that the 
panel decides the merits and disposition of an arbitration claim. 
Alternatively, under the proposed rule, parties may ask the court 
hearing the collective action to resolve the dispute concerning whether 
the claim is part of the collective action within 10 days of receiving 
notice that the Director has decided to refer the dispute to a panel.
    Fourth, proposed Rule 13204(b)(4) would prohibit a member firm or 
associated person from enforcing any arbitration agreement against a 
member of a certified or putative collective action with respect to any 
claim that is the subject of the certified or putative collective 
action until either the collective certification is denied or the group 
is decertified. This proposed rule clarifies that the existence of a 
certified or putative collective action nullifies any pre-dispute 
arbitration agreements. If, however, a court denies a plaintiff's 
request to certify a collective action or the court decertifies the 
collective action, the pre-dispute arbitration agreement would be 
enforceable, and FINRA would arbitrate the claims.
    Finally, FINRA is proposing to amend grammatical references in the 
concluding paragraph of Rule 13204 to clarify that it applies to class 
actions as well as collective actions.
    FINRA believes the proposed rule would facilitate the efficient 
resolution of collective actions, as the courts have established 
procedures to manage these types of representative actions. Moreover, 
FINRA believes access to courts for class or collective action 
litigation should be preserved for associated persons, and the proposal 
accomplishes this goal.
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. FINRA believes the proposal would facilitate the 
efficient resolution of collective actions, as courts have established 
procedures to manage these types of representative actions. Further, 
FINRA believes preserving access to courts for these types of claims 
for associated persons protects the public interest as it permits 
associated persons and the forum to allocate resources effectively.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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 or capital formation that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. 
Further, FINRA believes that the proposal will promote efficiency in 
the arbitration forum as class and collective actions will be 
administered by the judicial system, which have established procedures 
to manage such cases.

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.

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

    Within 45 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 or disapprove such proposed rule change, or

[[Page 1775]]

    (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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2011-075 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-2011-075. This 
file number should be included on the subject line if email 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-2011-075 and 
should be submitted on or before February 1, 2012.
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-310 Filed 1-10-12; 8:45 am]
BILLING CODE 8011-01-P


