
[Federal Register Volume 78, Number 12 (Thursday, January 17, 2013)]
[Notices]
[Pages 3925-3928]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00874]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68632; File No. SR-FINRA-2013-003]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Amendments to the Customer and Industry Codes of Arbitration Procedure 
To Revise the Public Arbitrator Definition

January 11, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on January 4, 2013, Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``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

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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 Customer and Industry Codes of 
Arbitration Procedure (``Codes'') to revise the definition of ``public 
arbitrator'' to exclude persons associated with a mutual fund or hedge 
fund from serving as public arbitrators and to require individuals to 
wait for two years after ending certain affiliations before they may be 
permitted to serve as public arbitrators. FINRA believes that the 
proposed amendments to the public arbitrator definition would improve 
investors' perception about the fairness and neutrality of FINRA's 
public arbitrator roster.
    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 classifies arbitrators under the Codes as either ``non-
public'' or ``public'' (non-public arbitrators are often referred to as 
``industry'' arbitrators). Non-public arbitrators are affiliated with 
the securities industry either through their current or former 
employment in a securities business, or because they provide 
professional services to securities businesses. Public arbitrators do 
not have any significant affiliation with the securities industry; nor 
are they related to anyone with a significant affiliation with the 
securities industry.
    To improve investor confidence in the neutrality of FINRA's public 
arbitrator roster, FINRA has amended its arbitrator definitions a 
number of times over the years.
    In 2004, FINRA amended the definitions of public arbitrator and 
non-public arbitrator to:
     Increase from three years to five years the period for 
transitioning from a non-public to public arbitrator after leaving the 
securities industry;
     Clarify that the term ``retired'' from the industry 
includes anyone who spent a substantial part of his or her career in 
the industry;
     Prohibit anyone who has been associated with the industry 
for at least twenty years from ever becoming a public arbitrator, 
regardless of how long ago the association ended;
     Exclude from the public arbitrator roster attorneys, 
accountants, or other professionals whose firms have derived ten 
percent or more of their annual revenue in the previous two years from 
clients involved in securities-related activities; and
     Provide that investment advisers may not serve as public 
arbitrators, and may only serve as non-public arbitrators if they 
otherwise qualify as non-public.\3\
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    \3\ See Exchange Act Rel. No. 49573 (April 16, 2004), 69 FR 
21871 (Apr. 22, 2004) (File No. SR-NASD-2003-95) (Order Granting 
Approval to a Proposed Rule Change Relating to Arbitrator 
Classification and Disclosure in NASD Arbitrations). The changes 
were announced in Notice to Members 04-49 (June 2004).
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    In 2007, FINRA revised the public arbitrator definition to exclude 
individuals who were employed by, or who served as an officer or 
director of, a company in a control relationship with a broker-dealer. 
Individuals were also excluded if a spouse or immediate family member 
served in such a capacity. In this rule change, FINRA also made it 
clear that people registered through a broker-dealer could not be 
public arbitrators even if they are employed by a non-broker-dealer 
(such as a bank).\4\
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    \4\ See Act Rel. No. 54607 (Oct. 16, 2006), 71 FR 62026 (Oct. 
20, 2006) (File No. SR-NASD-2005-094)(Order Approving Proposed Rule 
Change and Amendment No. 1 Thereto Relating to Amendments to the 
Classification of Arbitrators Pursuant to Rule 10308 of the NASD 
Code of Arbitration Procedure). The changes were announced in Notice 
to Members 06-64 (Nov. 2006).
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    Finally, in 2008, FINRA revised the public arbitrator definition to 
add a dollar limit to the 2004 ten-percent rule. This precluded an 
attorney, accountant, or other professional from serving as a public 
arbitrator if the individual's firm derived $50,000 or more in annual 
revenue in the past two years from professional services rendered to 
certain industry entities relating to customer disputes concerning an 
investment account or transaction.\5\
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    \5\ See Exchange Act Rel. No. 57492 (Mar. 13, 2008), 73 FR 15025 
(Mar. 20, 2008) (File No. SR-NASD-2007-021) (Order Approving 
Proposed Rule Change To Amend the Definition of Public Arbitrator). 
The changes were announced in Regulatory Notice 08-22 (May 2008).
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Proposal To Amend the Arbitrator Definition
    Recently, FINRA investor representatives raised concerns that they 
do not perceive certain arbitrators on the public roster as public 
because of their background or experience. To respond to this 
perception, FINRA is proposing to amend the public arbitrator 
definition to exclude persons associated with a mutual fund or hedge 
fund from serving as public arbitrators and to require individuals to 
wait for two years after ending certain affiliations before FINRA 
permits them to serve as public arbitrators.
    The public arbitrator definition does not expressly prohibit 
individuals associated with mutual funds and hedge funds from serving 
as public arbitrators. However, because of their association with the 
financial services industry, FINRA believes that these individuals 
should not serve as public arbitrators. Therefore, FINRA's current 
practice is to exclude these individuals from the public arbitrator 
roster until they terminate their affiliation with the hedge fund or 
mutual fund. For example, FINRA removed a public arbitrator from the 
roster because he was serving as a director of a mutual fund. FINRA is 
proposing to amend Rules 12100(u)(3) and 13100(u)(3), which exclude 
investment advisers from serving as public arbitrators, to exclude also 
persons associated with, including registered through, a mutual fund or 
hedge fund. The proposed rule change would respond to questions and 
concerns raised about arbitrator service by persons associated with 
mutual funds and hedge funds.
    FINRA is also proposing to amend the public arbitrator definition 
to add a two-year ``cooling off'' period before FINRA permits certain 
individuals to serve as public arbitrators. Currently under the Codes, 
an individual may not serve as a public arbitrator if he or she is:
     An investment adviser;
     An attorney, accountant, or other professional whose firm 
derived ten percent or more of its annual revenue in the past two years 
from certain financial industry entities;
     An attorney, accountant, or other professional whose firm 
derived $50,000 or more in annual revenue in the past two years from 
professional

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services rendered to certain financial industry entities relating to 
any customer disputes concerning an investment account or transaction;
     Employed by, or is the spouse or an immediate family 
member of a person who is employed by, an entity that directly or 
indirectly controls, is controlled by, or is under common control with, 
any partnership, corporation, or other organization that is engaged in 
the securities business; or
     A director or officer of, or is the spouse or an immediate 
family member of a person who is a director or officer of, an entity 
that directly or indirectly controls, is controlled by, or is under 
common control with, any partnership, corporation, or other 
organization that is engaged in the securities business.
    However, as soon as the individual ends the affiliation that was 
the basis for the exclusion from the public roster, the individual may 
begin serving as a public arbitrator. In one instance, an individual 
applying to be a public arbitrator had retired one month earlier from a 
lengthy career at a law firm that represented securities industry 
clients. Currently, Rule 12100(u)(5) provides that a public arbitrator 
may not be an attorney, accountant, or other professional whose firm 
derived $50,000 or more in annual revenue in the past two years from 
professional services rendered to specified securities industry clients 
relating to any customer disputes concerning an investment account or 
transaction. The applicant confirmed that the firm derived revenue of 
at least $50,000 during the past two years from clients in the 
securities industry relating to customer disputes. If the individual 
applied while employed at the firm, FINRA would not have approved the 
application. However, since the applicant left the firm one month 
earlier, and the rule does not include a cooling off period, the 
applicant was permitted to join the public arbitrator roster.
    FINRA is proposing to amend Rules 12100(u) and 13100(u) to provide 
that a person whom FINRA would not designate as a public arbitrator 
because of an affiliation under subparagraphs (3)-(7) (the exclusions 
detailed in the bullets above) shall not be designated as a public 
arbitrator for two calendar years after ending the affiliation. As 
stated above, FINRA is also proposing to add persons associated with 
mutual funds and hedge funds to Rules 12100(u)(3) and 13100(u)(3). 
Therefore, the two-year cooling off period would apply to these 
individuals as well. FINRA believes that the cooling off period would 
improve its constituents' perception about the neutrality of the 
arbitrators on the public roster.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Exchange Act,\6\ 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 amendments to 
the public arbitrator definition would benefit investors by addressing 
concerns raised about the fairness and neutrality of FINRA's public 
arbitrator roster. FINRA believes that by prohibiting persons 
associated with mutual funds or hedge funds from serving on the public 
roster, the proposed amendments further restrict the professional 
affiliations that a public arbitrator may have with the securities 
industry. The proposed two-year cooling off period seeks to ensure that 
potential arbitrators have sufficient separation from their 
affiliations with the securities industry. FINRA believes these 
restrictions would improve investors' perception of fairness and 
neutrality of the public roster.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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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 that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.

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 Exchange 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-2013-003 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-2013-003. 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-2013-003 and should be 
submitted on or before February 7, 2013.


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00874 Filed 1-16-13; 8:45 am]
BILLING CODE 8011-01-P


