
[Federal Register Volume 77, Number 72 (Friday, April 13, 2012)]
[Notices]
[Pages 22374-22376]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8880]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66774; File No. SR-FINRA-2011-075]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, Amending Rule 13024 of the Code of Arbitration 
Procedure for Industry Disputes To Preclude Collective Action Claims 
From Being Arbitrated

April 9, 2012.

I. Introduction

    On December 22, 2011, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') 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'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to amend Rule 13204 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. Specifically, the proposal would, 
among other things, (1) State that collective action claims under the 
FLSA, the ADEA, or the EPA may not be arbitrated under the Code; (2) 
provide that any claim involving similarly situated plaintiffs against 
the same defendants, such as a court-certified collective action or a 
putative collective action, would not be arbitrated in FINRA's 
arbitration forum; (3) give arbitrators the authority to decide 
disputes about whether a claim is part of a collective action; and (4) 
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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on January 11, 2012.\3\ The Commission received two comments 
on the proposed rule change.\4\ On March 29, 2012, FINRA filed a 
response to comments and a partial amendment to the proposed rule 
change (``Amendment No. 1'').\5\ The Commission is publishing this 
notice and order to solicit comment 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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    \3\ See Exchange Act Release No. 66109 (Jan. 5, 2012), 77 FR 
1773 (Jan. 11, 2012) (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) 
(``Notice''). The comment period closed on February 1, 2012.
    \4\ See Letter from Kevin M. Carroll, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association, dated February 1, 2012 (``SIFMA Letter''); and letter 
from Jill I. Gross, Director, Edward Pekarek, Assistant Director, 
and Genavieve Shingle, Student Intern, Investor Rights Clinic at 
Pace Law School, dated February 1, 2012 (``PIRC Letter''). Comment 
letters are available at http://www.sec.gov.
    \5\ See Letter from Mignon McLemore, Assistant Chief Counsel, 
FINRA, FINRA Dispute Resolution, to Elizabeth M. Murphy, Secretary, 
SEC, dated March 28, 2012 (``Response to Comments No. 1 and Partial 
Amendment No. 1''). The text of Response to Comments No. 1 and 
Partial 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 Web site at http://www.sec.gov.
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II. Description of Proposed Rule Change

    As stated in the Notice, Rule 13204 of the Industry Code generally 
provides 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. The Notice also stated 
that in 1999 FINRA issued an Interpretive Letter stating that its class 
action rules should include collective action claims brought under the 
FLSA and, therefore, considered these claims ineligible for arbitration 
in its forum.\6\ However, as described in the Notice, 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 compelled arbitration of such claims in FINRA's 
dispute resolution forum.\7\
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    \6\ See Notice (citing FINRA Interpretive Letter to Cliff 
Palefsky, Esq., dated September 21, 1999).
    \7\ Id. (citing 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)).
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    In response to the court's finding, FINRA is proposing to amend 
Rule 13204 to preclude collective action claims from being arbitrated 
in FINRA's forum under the Industry Code. The proposed amendments to 
Rule 13204, would separate Rule 13204 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.
    Proposed subparagraph (b)(1) would state that collective action 
claims under the FLSA, the ADEA, or the EPA may not be arbitrated under 
the Industry Code.
    Under proposed subparagraph (b)(2), any claim that involves 
plaintiffs who are similarly-situated against the same defendants as in 
a court-certified collective action or a putative collective action, or 
that is ordered by a court for collective action at a forum not 
sponsored by a self-regulatory organization, would not be arbitrated 
under the Industry Code, if the party bringing the claim has opted in 
to the collective action.
    Under proposed subparagraph (b)(3), as originally proposed, the 
Director would have referred to a panel any dispute as to whether a 
claim is part of a collective action, unless a party asked the court 
hearing the collective action to resolve the dispute within 10 days of 
receiving notice that the Director has decided to refer the dispute to 
a panel. Amendment No. 1, however, would permit a party to ask any 
forum (not just a court) hearing the collective action to resolve the 
dispute within the specified time.

[[Page 22375]]

    Subparagraph (b)(4), as originally proposed, would have provided 
that a member or associated person may not enforce 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 the collective action certification is 
denied or the collective action is decertified. Amendment No. 1, 
however, would specify that subparagraph (b)(4) would apply only to 
agreements to arbitrate in the FINRA forum, thus not affecting 
agreements to arbitrate in fora other than FINRA's.

III. Summary of Comment Letters

    As stated above, the proposed rule change was published for comment 
in the Federal Register on January 11, 2012, and the comment period 
closed on February 1, 2012. The Commission received two comment letters 
in response to the proposed rule change. On March 28, 2012, FINRA 
responded to the comments and filed Amendment No. 1 to the proposed 
rule change.
    The PIRC Letter strongly supported the proposed rule change.
    The SIFMA Letter did not object to the proposed rule change, but 
recommended revisions to certain language in proposed subparagraph (b). 
First, SIFMA recommended modifying proposed subparagraph (b)(2) to 
replace the phrase, ``Any claim that involves plaintiffs who are 
similarly situated against the same defendants as in a court-certified 
collective action or a putative collection action,'' with, ``Any claim 
that is the subject of a certified or putative collective action.'' 
SIFMA argued that FINRA's proposed language could be misconstrued to 
include multi-party litigation outside of the collective action 
context. SIFMA suggested that its proposed change would clarify FINRA's 
intent to limit the application of the proposed rule to collective 
actions.
    In its Response to Comments No. 1, FINRA declined to amend its 
proposed subparagraph (b)(2) as SIFMA suggested. FINRA stated that the 
revision is unnecessary because as proposed the rule already clarifies 
its applicability to only those parties who opt in to a collective 
action; furthermore, as proposed the rule would preclude those claims 
from being arbitrated in FINRA's forum only, and would not preclude 
their being arbitrated in other fora. FINRA also declined to remove the 
term ``similarly situated'' from proposed subparagraph (b)(2) as SIFMA 
suggested because the term is consistent with language used in the FLSA 
to describe party plaintiffs in collective actions under the 
statute,\8\ and the term helps define the parties to whom the proposal 
would apply.
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    \8\ See 29 U.S.C. 216(b).
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    Second, SIFMA recommended modifying proposed subparagraphs (b)(3) 
and (b)(4) to limit their scope to FINRA arbitration. Specifically, 
SIFMA recommended modifying proposed subparagraph (b)(3) by replacing 
``the court hearing the collective action'' with ``the court or other 
forum hearing the collective action.'' SIFMA stated that this change 
would clarify that arbitration fora, other than FINRA's forum, accept 
collective action claims. Similarly, SIFMA recommended modifying 
proposed subparagraph (b)(4) by replacing ``may not enforce any 
arbitration agreement'' with ``may not enforce an agreement to 
arbitrate in this forum.'' SIFMA stated that this change would clarify 
that under the proposed rule agreements to arbitrate collective action 
claims in arbitration fora other than FINRA would remain valid and 
enforceable.
    FINRA agreed to amend proposed subparagraphs (b)(3) and (b)(4) as 
SIFMA recommended. FINRA stated that it made these changes because the 
proposed rule is designed to prohibit collective action claims from 
being arbitrated in its forum only; FINRA members and their employees 
may, however, agree to address collective action claims either by 
filing them in a court of competent jurisdiction or by arbitrating them 
in other arbitration fora.

IV. Commission's Findings

    The Commission has carefully considered the proposed rule change, 
the comments received, FINRA's Response to Comments No. 1, and 
Amendment No. 1. The Commission finds that the proposed rule change, as 
amended, is consistent with the requirements of the Exchange Act, and 
the rules and regulations thereunder that are applicable to a national 
securities association.\9\ In particular, the Commission finds that the 
proposal is consistent with Section 15A(b)(6) of the Act,\10\ which 
requires, among other things, that the rules of a national securities 
association be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, protect investors and the 
public interest.
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    \9\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78o-3(b)(6).
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    The proposed rule change, as amended, would facilitate the 
efficient resolution of collective actions under the FLSA, ADEA, or the 
EPA, as courts have established procedures to manage these types of 
representative actions. It also would preserve access to courts for 
these types of claims for employees of FINRA members.
    The Commission believes that FINRA has responded adequately to 
SIFMA's comments recommending revisions to certain language in proposed 
subparagraphs (b)(2), (b)(3) and (b)(4) to the proposed rule by 
explaining, among other things, why it is proposing to revise proposed 
subparagraphs (b)(3) and (b)(4), but is not proposing to revise 
subparagraph (b)(2). In response to SIFMA's comments, FINRA proposed to 
amend proposed subparagraphs (b)(3) and (b)(4) to acknowledge that 
arbitration fora other than FINRA's dispute resolution forum accept 
collective action claims. FINRA has suitably explained its reasons for 
declining to amend proposed subparagraph (b)(2) as SIFMA recommended.

V. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act \11\ for approving the proposed rule change, as modified by 
Amendment No. 1, prior to the 30th day after publication of Amendment 
No. 1 in the Federal Register. The changes proposed in Amendment No. 1 
revised proposed subparagraphs (b)(3) and (b)(4) in response to 
specific concerns raised by SIFMA. The amendment addresses these 
concerns by clarifying that arbitration fora, other than FINRA's forum, 
accept collective action claims, and that under the proposed rule 
agreements to arbitrate collective action claims in arbitration fora 
other than FINRA would remain valid and enforceable.
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    \11\ 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:

[[Page 22376]]

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 May 4, 2012.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-FINRA-2011-075), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-8880 Filed 4-12-12; 8:45 am]
BILLING CODE 8011-01-P


