
[Federal Register Volume 78, Number 69 (Wednesday, April 10, 2013)]
[Notices]
[Pages 21449-21452]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08323]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69297; File No. SR-FINRA-2013-003]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Amend the 
Customer and Industry Codes of Arbitration Procedure To Revise the 
Public Arbitrator Definition

April 4, 2013.

I. Introduction

    On January 4, 2012, 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

[[Page 21450]]

of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
a proposed rule change to amend FINRA's Customer and Industry Codes of 
Arbitration Procedure (collectively, the ``Codes'') to revise the 
definition of ``public arbitrator'' in the Codes. Specifically, the 
proposed rule change would (a) exclude persons associated with a mutual 
fund or hedge fund from serving as public arbitrators and (b) require 
individuals to wait for two years after ending certain affiliations 
before they may be permitted to serve as public arbitrators. The 
proposed rule change was published for comment in the Federal Register 
on January 17, 2013.\3\ The Commission received 45 comment letters on 
the proposed rule change,\4\ and a response to comments from FINRA.\5\ 
This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 68632 (Jan. 11, 2013), 78 FR 
3925 (Jan. 17, 2013) (``Notice''). The comment period closed on 
February 7, 2013.
    \4\ See Letter from Steven B. Caruso, Maddox Hargett & Caruso, 
dated Jan. 16, 2013 (``Caruso Letter''); letter from David Neuman, 
Stoltmann Law Offices, dated Jan. 16, 2013 (``Neuman Letter''); 
letter from Richard M. Layne, Law Office of Richard M. Layne, dated 
Jan. 28, 2013 (``Layne Letter''); letter from Seth E. Lipner, 
Professor of Law, Zickloin School of Business, Baruch College, and 
Member, Deutsch & Lipner, dated Jan. 29, 2013 (``Lipner Letter''); 
letter from Carl J. Carlson, Tousley Brain Stephens, dated Jan. 29, 
2013 (``Carlson Letter''); letter from David Harrison, Law Offices 
of David Harrison, dated Jan. 29, 2013 (``Harrison Letter''); letter 
from Philip M. Aidikoff, dated Jan. 29, 2013 (``Aidikoff Letter''); 
letter from Scott L. Silver, Silver Law Group, dated Jan. 30, 2013 
(``Silver Letter''); letter from Robert A. Uhl, Adjunct Professor of 
Law, Securities Arbitration and Director, Pepperdine Investor 
Advocacy Clinic, and Partner, Aidikoff, Uhl & Bakhtiari, dated Jan. 
30, 2013 (``Uhl Letter''); letter from Andrew A. Lipkowitz, Student 
Intern, and Christine Lazaro, Acting Director, St. John's University 
School of Law Securities Arbitration Clinic, dated Feb. 4, 2013 
(``St. John's Letter''); letter from Robert C. Port, Cohen Goldstein 
Port & Gottlieb, dated Feb. 5, 2013 (``Port Letter''); letter from 
Lisa A. Catalano, dated Feb. 5, 2013 (``Catalano Letter''); letter 
from Scott R. Shewan, Pape & Shewan, dated Feb. 6, 2013 (``Shewan 
Letter''); letter from Jon C. Furgison, Law Offices of Jon C. 
Furgison, dated Feb. 6, 2013 (``Furgison Letter''); letter from 
Steven J. Gard, Reznicsek Fraser White & Shaffer, dated Feb. 6, 2013 
(``Gard Letter''); letter from Jonathan W. Evans and Michael S. 
Edmiston, Jonathan W. Evans & Associates, dated Feb. 6, 2013 
(``Evans and Edmiston Letter''); letter from Robert Savage, Visiting 
Assistant Clinical Professor, Florida International University 
College of Law, dated Feb. 7, 2013 (``Savage Letter I''); letter 
from Robert Savage dated Feb. 7, 2013 (``Savage Letter II''); letter 
from James A. Dunlap, Jr., James A. Dunlap Jr. & Associates, dated 
Feb. 7, 2013 (``Dunlap Letter''); letter from Diane Nygaard, Kenner, 
Schmitt & Nygaard, dated Feb. 7, 2013 (``Nygaard Letter''); letter 
from W. Scott Greco, Greco & Greco, dated Feb. 7, 2013 (``Greco 
Letter''); letter from A. Heath Abshure, NASAA President and 
Arkansas Securities Commissioner, dated Feb. 7, 2013 (``NASAA 
Letter''); letter from Robert S. Banks, Jr., Banks Law Office, dated 
Feb. 7, 2013 (``Banks Letter''); letter from Dale Ledbetter, Esq., 
Ledbetter and Associates, dated Feb. 7, 2013 (``Ledbetter Letter''); 
letter from Scott C. Ilgenfritz, President, Public Investors 
Arbitration Bar Association, dated Feb. 7, 2013 (``PIABA Letter''); 
letter from Elizabeth Zeck, Willoughby & Hoefer, dated Feb. 7, 2013 
(``Zeck Letter''); letter from James A. Sigler, dated Feb. 7, 2013 
(``Sigler Letter''); letter from Robert W. Goehring, dated Feb. 7, 
2013 (``Goehring Letter''); letter from William S. Shepherd, 
Shepherd Smith Edwards & Kantas, dated Feb. 7, 2013 (``Shepherd 
Letter''); letter from Leonard Steiner, Beverly Hills, California, 
dated Feb. 7, 2013 (``Steiner Letter''); letter from Joseph Fogel, 
Fogel & Associates, dated Feb. 7, 2013 (``Fogel Letter''); letter 
from Richard A. Lewins, dated Feb. 7, 2013 (``Lewins Letter''); 
letter from Jenice L. Malecki, Malecki Law, dated Feb. 7, 2013 
(``Malecki Letter''); letter from Mark E. Sanders, Halling & Cayo, 
dated Feb. 7, 2013 (``Sanders Letter''); letter from Jeffrey Sonn, 
Sonn & Erez, dated Feb. 7, 2013 (``Sonn Letter''); letter from 
Thomas C. Costello, dated Feb. 7, 2013 (``Costello Letter''); letter 
from Barry D. Estell, dated Feb. 7, 2013 (``Estell Letter''); letter 
from Royal Lea, dated Feb. 7, 2013 (``Lea Letter''); letter from 
Peter Mougey, Levin, Papantonio, Thomas, Mitchell, Rafferty & 
Proctor, dated Feb. 7, 2013 (``Mougey Letter''); letter from William 
A. Jacobson, Associate Clinical Professor, Cornell Law School, and 
Director, Cornell Securities Law Clinic, and Malavika Rao, Cornell 
Law School `14, dated Feb. 7, 2013 (``Cornell Letter''); letter from 
David T. Bellaire, Executive Vice President and General Counsel, 
Financial Services Institute, dated Feb. 7, 2013 (``FSI Letter''); 
letter from Theodore M. Davis, dated Feb. 8, 2013 (``Davis 
Letter''); letter from Nicholas J. Guiliano, dated Feb. 8, 2013 
(``Guiliano Letter''); letter from Mitchell Ostwald, dated Feb. 8, 
2013 (``Ostwald Letter''); letter from Charles Michael Tobin, The 
Tobin Law Firm, dated Feb 22, 2013 (``Tobin Letter''). Comment 
letters are available at http://www.sec.gov.
    \5\ See Letter from Margo A. Hassan, Assistant Chief Counsel, 
FINRA Dispute Resolution, to Elizabeth M. Murphy, Secretary, 
Commission, dated Mar. 11, 2013 (``Response Letter''). The text of 
the proposed rule change and a copy of FINRA's Response Letter are 
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. A copy of the Response Letter is also available on the 
Commission's Web site at http://www.sec.gov.
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II. Description of the Proposal

    As stated in the Notice, FINRA classifies arbitrators under the 
Codes as either ``non-public'' (otherwise known as ``industry'' 
arbitrators) or ``public.'' Arbitrators are generally considered non-
public if they are affiliated with the securities industry either 
because they (1) are currently or were formerly employed in a 
securities business; or (2) provide professional services to securities 
businesses. Arbitrators are generally considered public if they (1) do 
not have any significant affiliation with the securities industry; and 
(2) are not 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 amount of time 
necessary after leaving the securities industry to transition from a 
non-public to public arbitrator;
     Clarify that ``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 definition of ``public arbitrator'' 
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 (``Ten-Percent 
Rule''); 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.\6\ In 2007, FINRA again revised the 
definition of ``public arbitrator'' to:
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    \6\ 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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     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.
     Exclude individuals with a spouse or immediate family 
member who was employed by, or who served as an officer or director of, 
a company in a control relationship with a broker-dealer; and
     Clarify 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).\7\
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    \7\ 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 Ten-Percent Rule. The amended definition was 
designed to preclude 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

[[Page 21451]]

disputes concerning an investment account or transaction.\8\
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    \8\ 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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    The proposed rule change is designed to improve investor confidence 
in the neutrality of FINRA's public arbitrator roster. In particular, 
the proposed rule change would (a) exclude persons associated with a 
mutual fund or hedge fund from serving as public arbitrators and (b) 
require individuals to wait for two years after ending certain 
affiliations before they may be permitted to serve as public 
arbitrators.
    FINRA has indicated that it would announce the effective date of 
the proposed rule change in a Regulatory Notice to be published no 
later than 60 days following Commission approval, and that the 
effective date would be no later than 30 days following publication of 
the Regulatory Notice announcing Commission approval.

III. Discussion of Comment Letters

    As stated above, the Commission received 45 comment letters on the 
proposed rule change in response to the Notice. Thirty-eight of those 
commenters (represented by 39 comment letters) generally supported 
FINRA's proposal to revise the definition of ``public arbitrator'' to 
exclude persons associated with a mutual fund or hedge fund from 
serving as public arbitrators.\9\ Of those commenters, however, many 
stated that while they agreed with the proposed rule change, they 
thought FINRA should exclude additional categories of persons from the 
definition of ``public arbitrator.'' Moreover, some otherwise 
supportive commenters thought that FINRA should lengthen the proposed 
cooling off period.
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    \9\ See Caruso Letter; Neuman Letter; Layne Letter; Lipner 
Letter; Carlson Letter; Aidikoff Letter; Silver Letter; Uhl Letter; 
St. John's Letter; Port Letter; Catalano Letter; Shewan Letter; 
Furgison Letter; Evans and Edmiston Letter; Savage Letter I; Savage 
Letter II; Dunlap Letter; Nygaard Letter; Greco Letter; NASAA 
Letter; Banks Letter; Ledbetter Letter; PIABA Letter; Zeck Letter; 
Sigler Letter; Goehring Letter; Shepherd Letter; Fogel Letter; 
Lewins Letter; Malecki Letter; Sanders Letter; Sonn Letter; Costello 
Letter; Estell Letter; Cornell Letter; Davis Letter; Guiliano 
Letter; Ostwald Letter; Tobin Letter.
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A. Exclusions

    Three commenters suggested that the definition of ``public 
arbitrator'' should be further narrowed to expressly exclude from ever 
acting as a public arbitrator persons associated with issuers or 
sponsors of private placements, publicly offered non-traded REITs, 
variable insurance products, and other investment products.\10\ These 
commenters also suggested that the definition of ``public arbitrator'' 
should exclude persons who have ever worked for more than a de minimis 
time as a stockbroker or investment advisor, as well as persons with 
more than a de minimis time of affiliation with a FINRA member firm, an 
investment advisory firm, a hedge fund, a mutual fund, or an issuer, 
sponsor, marketer, or seller of securities or investment products with 
embedded securities.\11\ Similarly, two commenters suggested that 
anyone who has been licensed to do business in the securities industry 
or depended on the industry for more than a de minimis amount of his or 
her livelihood for any appreciable length of time should be excluded 
from the definition of ``public arbitrator.'' \12\
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    \10\ See PIABA Letter; Sanders Letter; Cornell Letter.
    \11\ Id.
    \12\ See Lewins Letter; Cornell Letter.
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    One commenter suggested that the definition of ``public 
arbitrator'' should exclude any attorney whose firm has derived $50,000 
or ten percent or more of its annual revenue in the prior two years 
from professional services rendered to claimants in customer disputes 
concerning an investment account or transaction.\13\ Another commenter 
suggested that individuals who have been employed by securities 
industry trade organizations such as FINRA should be barred from being 
classified as public arbitrators.\14\
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    \13\ See FSI Letter.
    \14\ See Davis Letter.
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    One commenter generally approved of the proposed rule change but 
maintained that, in the context of customer disputes, FINRA's current 
definition of ``non-public arbitrator'' must be broadened to include 
the entire securities industry, particularly if FINRA plans to open up 
its forum to non-members.\15\
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    \15\ See NASAA Letter.
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    Finally, another commenter believed the proposed rule change should 
exclude additional categories of individuals from the definition of 
``public arbitrator'' but ultimately disapproved of the proposed rule 
change on the grounds that it would continue to permit individuals who 
previously worked in and have financial interests connected to the 
securities industry to be classified as public arbitrators.\16\ This 
commenter also expressed the view that the amended rule would continue 
to give FINRA staff too much discretion in classifying arbitrators. 
Another commenter expressed the same concern.\17\
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    \16\ See Gard Letter.
    \17\ See Gard Letter; Estell Letter.
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B. Cooling-Off Period

    Fourteen commenters suggested that FINRA's proposal to require 
individuals to wait for two years after ending certain affiliations 
before they may be permitted to serve as public arbitrators should be 
amended to increase the proposed ``cooling off'' period from two years 
to at least five years.\18\ Five commenters suggested that the proposed 
cooling off period should generally be longer than two years.\19\ Three 
commenters generally disapproved of the length of the proposed two-year 
cooling off period on the grounds that it would not serve the interests 
of investors.\20\ Two commenters suggested expanding the proposed 
cooling off period from two years to ten.\21\ One commenter suggested 
that no individual who has spent ten years or more in the securities 
industry should ever be classified as a public arbitrator.\22\ Another 
commenter suggested that anyone associated with the industry for twenty 
or more years should be prohibited from ever becoming a public 
arbitrator.\23\ Eleven commenters suggested that no cooling off period 
is sufficient and that only individuals who have never had an 
affiliation with the financial services industry should be eligible to 
serve as public arbitrators.\24\
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    \18\ See Caruso Letter; Neuman Letter; Layne Letter; Harrison 
Letter; Silver Letter; St. John's Letter; Catalano Letter; Zeck 
Letter; Shepherd Letter; Malecki Letter; Costello Letter; Estell 
Letter; Cornell Letter; Guiliano Letter.
    \19\ See Greco Letter; PIABA Letter; Fogel Letter; Lewins 
Letter; Sanders Letter.
    \20\ See Dunlap Letter; Nygaard Letter; Goehring Letter.
    \21\ See Carlson Letter; Evans and Edmiston Letter.
    \22\ See Uhl Letter.
    \23\ See Harrison Letter.
    \24\ See Lipner Letter; Aidikoff Letter; Silver Letter; Port 
Letter; Shewan Letter; Furgison Letter; Evans and Edmiston Letter; 
NASAA Letter; Sonn Letter; Davis Letter; Ostwald Letter.
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    In its Response Letter, FINRA stated that the purpose of the 
proposed rule change is to respond to investor representatives' 
concerns that certain arbitrators on the public roster were not 
perceived as public because of their background and experience. 
Specifically, FINRA stated that the proposed rule change would affect 
certain persons whose job precludes them from being classified as a 
public arbitrator but does not qualify them as a non-public arbitrator. 
In addition, FINRA stated that the proposed rule would require persons 
precluded by their job from being classified as a public arbitrator to 
wait two years

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before being eligible to join the public roster after moving to a job 
that would not otherwise disqualify them for service. FINRA maintained 
that the proposed two-year cooling off period responds to the concerns 
raised by investor representatives and would be a positive step toward 
enhancing investors' perception of fairness in FINRA's arbitration 
forum. FINRA also stated that it intends to further review, under the 
auspices of the National Arbitration and Mediation Committee, both the 
public and non-public arbitrator definitions with a view towards 
clarifying the definitions and reviewing additional issues such as 
those raised in comment letters on the proposed rule change. Therefore, 
FINRA declined to amend the proposed rule change.

IV. Commission's Findings

    The Commission has carefully reviewed the proposed rule change, the 
comments received, and FINRA's Response Letter. Based on its review of 
the record, the Commission 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.\25\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\26\ 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.
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    \25\ In approving this proposed rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \26\ 15 U.S.C. 78o-3(b)(6).
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    More specifically, the Commission finds that the proposed rule 
change to exclude persons associated with a mutual fund or hedge fund 
from serving as public arbitrators and require individuals to wait for 
two years after ending certain affiliations before they may be 
permitted to serve as public arbitrators would benefit investors and 
other participants in the forum by improving investor confidence in the 
neutrality of FINRA's public arbitrator roster. While the Commission 
appreciates the suggestions regarding exclusions from the definition of 
``public arbitrator'' and the proposed two-year cooling off period, we 
believe that FINRA has responded adequately to comments. We also agree 
with the Response Letter's position that the proposed rule change 
should improve investors' perception about the fairness and neutrality 
of FINRA's public arbitrator roster, particularly given the Response 
Letter's representation that FINRA intends to conduct a comprehensive 
review of both the public and non-public arbitrator definitions with a 
view towards further clarifying the definitions and reviewing 
additional issues such as those raised in comment letters on the 
proposed rule change.
    For the reasons stated above, the Commission finds that the 
proposed rule change is consistent with the Act and the rules and 
regulations thereunder.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-FINRA-2013-003) be, and it 
hereby is, approved.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08323 Filed 4-9-13; 8:45 am]
BILLING CODE 8011-01-P


