
[Federal Register Volume 77, Number 176 (Tuesday, September 11, 2012)]
[Notices]
[Pages 55885-55887]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-22219]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67784; File No. SR-FINRA-2012-040]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend the 
By-Laws of FINRA Dispute Resolution, Inc. To Clarify That Services 
Provided by Mediators Should Not Cause Them To Be Classified as 
Industry Members Under the By-Laws

September 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 August 23, 2012, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the By-Laws of FINRA Dispute 
Resolution, Inc. (By-Laws) to clarify that services provided by 
mediators, when acting in such capacity and not representing parties in 
mediation, should not cause the individuals to be classified as 
Industry Members under the By-Laws.
    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
Background
    FINRA believes that mediators who are otherwise qualified should be 
eligible to become Public Members of the National Arbitration and 
Mediation Committee (NAMC), a committee appointed by the Board of 
Directors of FINRA Dispute Resolution, Inc. (FINRA DR). Currently, they 
cannot because of the definitions of Industry Member \3\ and Public 
Member \4\ in the FINRA Dispute Resolution By-Laws (By-Laws).
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    \3\ See Dispute Resolution By-Laws, Article I(s) (Definitions--
Industry Member).
    \4\ See Dispute Resolution By-Laws, Article I(x) (Definitions--
Public Member).
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    In a FINRA mediation, all parties agree on the selection of a 
mediator, agree on the compensation of the mediator, and agree on how 
to allocate the mediator's compensation among the parties. Thus, a 
mediator receives part of the compensation in each case from an 
industry party. However, for mediations to which investors are parties, 
mediators represent neither the investors nor the FINRA-registered 
individuals or entities. Similarly, for mediations involving industry 
parties only, mediators represent neither the FINRA-registered 
individuals nor entities. In both types of mediations, FINRA believes 
that the revenue mediators receive from FINRA-registered individuals or 
firms for their mediation activity should not prevent mediators from 
being classified as Public Members under the By-Laws.
    Pursuant to the Plan of Allocation and Delegation of Functions by 
FINRA to Subsidiaries (Delegation Plan), the NAMC has the powers and 
authority pursuant to FINRA's Rules to advise the FINRA DR Board on the 
development and maintenance of an equitable and efficient system of 
dispute resolution that will equally serve the needs of public 
investors and FINRA members, to monitor rules and procedures governing 
the conduct of dispute resolution, and to have such other powers and 
authority as is necessary to effectuate the purposes of FINRA's 
Rules.\5\ The Delegation Plan provides that the FINRA DR Board must 
appoint the NAMC, whose membership must

[[Page 55886]]

consist of a majority of Public Members.\6\
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    \5\ See Plan of Allocation and Delegation of Functions by FINRA 
to Subsidiaries--NASD Dispute Resolution, Sec.  III(C)(1)(b).
    \6\ Id. See also Rules 12102(a) and 12102(a)(1) of the Code of 
Arbitration Procedure for Customer Disputes (``Customer Code'') and 
Rules 13102(a) and 13102(a)(1) of the Code of Arbitration Procedure 
for Industry Disputes (``Industry Code'').
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    Currently, under the By-Laws, a mediator could be classified as an 
Industry Member rather than a Public Member for purposes of Committee 
participation because of the services provided by a mediator to an 
industry party. Mediators are neutrals and do not represent any party 
in the mediation. In FINRA's mediation forum, mediators are retained 
only by agreement of all parties to a dispute rather than by any one 
party. Further, the parties compensate mediators jointly pursuant to 
that agreement. While mediators derive some of their revenue from 
brokers or dealers, FINRA does not believe the compensation earned in 
the capacity as a mediator compromises the mediator's neutrality. As 
such, FINRA believes that the unique role played by mediators should be 
recognized in the By-Laws. Further, FINRA believes that mediation 
activity in cases involving industry parties should not prevent 
individuals from being classified as Public Members under the By-Laws.
    FINRA is, therefore, proposing to amend the definitions of Industry 
Members \7\ and Public Members \8\ in the By-Laws so that services 
provided by mediators, while acting in such capacity and not 
representing parties in mediation, would not cause these individuals to 
be classified as Industry Members.
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    \7\ See note 3, supra.
    \8\ See note 4, supra.
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Proposal To Amend the By-Laws
    FINRA is proposing to amend the definitions of Industry Member \9\ 
and Public Member \10\ under the By-Laws. These amendments would create 
an exception for any services provided by mediators in the capacity as 
a mediator of disputes involving a broker or dealer and not 
representing any party in such mediations, so that mediators may be 
eligible to serve as Public Members of the NAMC if they are not 
otherwise disqualified from being classified as Public Members. Parties 
in a mediation select their mediator by agreement. The mediators work 
with all parties simultaneously to help them resolve a dispute. The 
mediator has no power to decide the outcome and does not represent any 
party in the matter.
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    \9\ See note 3, supra.
    \10\ See note 4, supra.
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    The proposal would amend two parts of the definition of Industry 
Member.\11\ First, Article I(s)(4) of the By-Laws defines an Industry 
Member as a committee member who provides professional services to 
brokers or dealers, and such services constitute 20 percent or more of 
the professional revenues received by the Director or member or 20 
percent or more of the gross revenues received by the Director's or 
member's firm or partnership. The proposal would amend the definition 
to exempt any services provided in the capacity as a mediator of 
disputes involving a broker or dealer and not representing any party in 
such mediations from being considered professional services provided to 
brokers or dealers.
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    \11\ The By-Laws define an Industry Member using six criteria. 
The proposal would amend two of them, subsections (4) and (5). See 
Dispute Resolution By-Laws, Article I(s) (Definitions--Industry 
Member).
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    Second, Article I(s)(5) of the By-Laws defines an Industry Member 
as a committee member who provides professional services to a director, 
officer, or employee of a broker, dealer, or corporation that owns 50 
percent or more of the voting stock of a broker or dealer, and such 
services relate to the director's, officer's, or employee's 
professional capacity and constitute 20 percent or more of the 
professional revenues received by the Director or member or 20 percent 
or more of the gross revenues received by the Director's or member's 
firm or partnership. Similar to the change in Article I(s)(4) described 
in the paragraph above, FINRA proposes to amend the definition to 
exempt any services provided in the capacity as a mediator of disputes 
involving a director, officer, or employee as described in this 
definition and not representing any party in such mediations from being 
considered professional services provided to such individuals.
    The proposed revisions to the definition of Industry Member would 
establish that any services provided in the capacity as a mediator of 
disputes involving a broker or dealer and not representing any party in 
such mediations would not be considered services provided to brokers or 
dealers or affiliated individuals for purposes of measuring the 
professional revenues received by the NAMC member. FINRA believes the 
proposed amendments to the Industry Member definition would acknowledge 
the capacity in which mediators derive revenue from parties, including 
industry parties, yet recognize that the revenue earned in the capacity 
would not compromise the person's neutrality.
    The proposal would also amend the definition of Public Member. The 
By-Laws define a Public Member as a committee member who has no 
material business relationship with a broker or dealer or a self-
regulatory organization registered under the Act (other than serving as 
a public director or public member on a committee of such a self-
regulatory organization). The proposal would amend the definition by 
adding language to the parenthetical to clarify that acting in the 
capacity as a mediator of disputes involving a broker or dealer and not 
representing any party in such mediations is not considered a material 
business relationship with a broker or dealer. FINRA believes that the 
proposed amendment to the Public Member definition would recognize that 
a mediator's service as a mediator would not, in itself, create any 
relationships with the securities industry that could compromise the 
mediator's independent judgment or decision-making.
    Moreover, the proposed revisions to the By-Law definitions would 
incorporate current rule language from the definitions of non-public 
and public arbitrators found in the Code of Arbitration Procedure for 
Customer Disputes and the Code of Arbitration Procedure for Industry 
Disputes. In 2005, the SEC approved the then-NASD's new Interpretive 
Material (IM) 10308 which stated, among other things, that mediation 
fees received by mediators who are also arbitrators shall not be 
included in the definition of ``revenue'' for purposes of Rule 
10308(a)(5)(A)(iv), so long as the mediator is acting in the capacity 
of a mediator and is not representing a party in the mediation.\12\ 
FINRA believes that using current rule language to amend its By-Laws, 
as proposed, would facilitate the uniform interpretation and 
application of its rules.
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    \12\ See Securities Exchange Act Rel. No. 51325 (Mar. 7, 2005), 
70 FR 12522 (Mar. 14, 2005). The IM was renumbered and the rule 
language modified and added to the definitions of non-public and 
public arbitrator when FINRA adopted the revisions to the Customer 
and Industry Codes. See Securities Exchange Act Rel. No. 55158 (Jan. 
24, 2007), 72 FR 4574 (Jan. 31, 2007) (File Nos. SR-NASD-2003-158 
and SR-NASD-2004-011).
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A of the Act, including Section 15A(b)(2) of 
the Act, in that it provides for the organization of FINRA and FINRA 
Dispute Resolution in a manner that will permit FINRA to carry

[[Page 55887]]

out the purposes of the Act, to comply with the Act, and to enforce 
compliance by FINRA members and persons associated with FINRA members 
with the Act, the rules and regulations thereunder, FINRA rules and the 
federal securities laws. FINRA further believes that the proposed rule 
change is consistent with Section 15A(b)(4) of the Act, which requires, 
among other things, that FINRA's rules assure a fair representation of 
its members in the selection of its directors and administration of its 
affairs and provides that one or more directors shall be representative 
of issuers and investors and not be associated with a member of FINRA, 
broker or dealer. FINRA believes that the proposal would assure fair 
administration of its Dispute Resolution affairs by providing another 
source of qualified and experienced candidates from which to select 
public members for the NAMC.

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.\13\ 
Further, FINRA believes that the proposal will promote efficiency in 
the arbitration forum as it will provide another source of qualified 
and experienced candidates from which to select public members for the 
NAMC.
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    \13\ 15 U.S.C. 78c(f).
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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
    (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-2012-040 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-2012-040. 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-2012-040 and should be 
submitted on or before October 2, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-22219 Filed 9-10-12; 8:45 am]
BILLING CODE 8011-01-P


