
[Federal Register Volume 79, Number 101 (Tuesday, May 27, 2014)]
[Notices]
[Pages 30206-30209]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-12075]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72196; File No. SR-FINRA-2014-005]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Partial Amendment No. 1 and Order 
Instituting Proceedings to Determine Whether to Approve or Disapprove a 
Proposed Rule Change, as Modified by Partial Amendment No. 1, Relating 
to Broadening Arbitrators' Authority to Make Referrals During an 
Arbitration Proceeding

May 20, 2014.

I. Introduction

    On July 12, 2010, the Financial Industry Regulatory Authority 
(``FINRA'') filed a proposal pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ with the Securities and Exchange Commission

[[Page 30207]]

(``Commission'') to amend Rule 12104 (Effect of Arbitration on FINRA 
Regulatory Activities) of the Code of Arbitration Procedure for 
Customer Disputes (``Customer Code'') and Rule 13104 (Effect of 
Arbitration on FINRA Regulatory Activities) of the Code of Arbitration 
Procedure for Industry Disputes (``Industry Code'') (together, 
``Codes'') to permit arbitrators to make referrals to FINRA during an 
arbitration case, and to adopt new rules to address the assessment of 
hearing session fees, costs, and expenses if an arbitrator made a 
referral during a case that resulted in withdrawal of the entire panel 
(``original proposal'').\3\ Under the original proposal, if an 
arbitrator made a mid-case referral, a party could request that the 
referring arbitrator withdraw. Upon a party's request that the 
referring arbitrator withdraw, the entire panel also would have been 
required to withdraw. On July 7, 2011, FINRA responded to comments 
received by the Commission by filing an amendment to the original 
proposal,\4\ which replaced it in its entirety.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Rel. No. 62930 (Sept. 17, 2010), 
75 FR 58007 (Sept. 23, 2010) (SR-FINRA-2010-036).
    \4\ See Securities Exchange Act Rel. No. 64954 (Jul. 25, 2011), 
76 FR 45631 (Jul. 29, 2011) (SR-FINRA-2010-036) (Notice of Filing 
Proposed Rule Change and Amendment No. 1 to Amend the Codes of 
Arbitration Procedure To Permit Arbitrators To Make Mid-Case 
Referrals) (hereinafter, the ``amended original proposal,'' to 
distinguish Amendment No.1 to the original proposal from the current 
proposal as amended by Partial Amendment No. 1. See infra, Section 
IV).
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    Under the amended original proposal, an arbitrator would have been 
permitted to make a mid-case referral if he or she became aware of any 
matter or conduct that the arbitrator had reason to believe posed a 
serious ongoing or imminent threat that was likely to harm investors. A 
mid-case referral could not have been based solely on allegations in 
the pleadings. The amended original proposal also would have instructed 
the arbitrator to wait until the arbitration concluded to make a 
referral if investor protection would not have been materially 
compromised by the delay. Further, if an arbitrator made a mid-case 
referral, the Director of Arbitration (``Director'') would have 
disclosed the act of making the referral to the parties, and a party 
would have been permitted to request recusal of the referring 
arbitrator. The amended original proposal would have required either 
the President of FINRA Dispute Resolution (``President'') or the 
Director to evaluate the referral and determine whether to forward it 
to other divisions of FINRA for further review. Finally, the amended 
original proposal would have retained the provision in Rule 12104(b) of 
the Customer Code and Rule 13104(b) of the Industry Code that permits 
an arbitrator to make a post-case referral. The Commission received 
five comment letters in response to the amended original proposal.
    On January 29, 2014, FINRA withdrew the amended original proposal 
\5\ without responding to the comments and filed the current proposal. 
The current proposal is identical to the amended original proposal and 
FINRA's filing responds to comments received on the amended original 
proposal. The proposed rule change was published for comment in the 
Federal Register on February 12, 2014.\6\ The Commission received ten 
comment letters in response to the current proposal.\7\ On March 28, 
2014, FINRA extended to May 20, 2014 the time period in which the 
Commission must approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change. On May 19, 2014, FINRA 
responded to the comments and filed Partial Amendment No. 1 to the 
current proposal.\8\
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    \5\ See SR-FINRA-2010-036, Withdrawal of Proposed Rule Change, 
available at http://www.finra.org/Industry/Regulation/RuleFilings/2010/P121722.
    \6\ See Securities Exchange Act Rel. No. 71534 (Feb 12, 2014), 
79 FR 9523 (Feb. 19, 2014) (SR-FINRA-2014-005) (``Notice of 
Filing'').
    \7\ See Letters from Gary Berne, Stolle Berne, dated Feb. 6, 
2014 (``Berne''); Jason Doss, President, Public Investors 
Arbitration Bar Association, dated Feb. 26, 2014 (``PIABA''); Steven 
B. Caruso, Esq., Maddox Hargett & Caruso, P.C., dated Mar. 4, 2014 
(``Caruso''); George H. Friedman, George H. Friedman Consulting, 
LLC, dated Mar. 5, 2014 (``Friedman''); William A. Jacobson, 
Clinical Professor of Law, Cornell Law School, and Director, Cornell 
Securities Law Clinic, dated Mar. 11, 2014 (``Cornell''); William D. 
Nelson, Lewis Roca Rothgerber LLP, dated Mar. 11, 2014 (``Nelson''); 
Nicole G. Iannarone, Esq., Assistant Clinical Professor, Georgia 
State University College of Law Investor Advocacy Clinic, dated Mar. 
11, 2014 (``GSU''); Elissa Germaine, Supervising Attorney, and 
Michelle N. Robinson, Student Intern, Pace Investor Rights Clinic, 
Pace Law School, dated Mar. 12, 2014 (``Pace''); Ryan Jennings, 
Christian Corkery, and Daniel Coleman, Legal Interns, St. John's 
University School of Law Securities Arbitration Clinic, dated Mar. 
12, 2014 (``St. John's''); and Richard P. Ryder, Esquire, President, 
Securities Arbitration Commentator, dated Mar. 12, 2014 (``Ryder''). 
Comment letters are available at http://www.sec.gov.
    \8\ See Letter from Mignon McLemore, Assistant General Counsel, 
FINRA Dispute Resolution, to Lourdes Gonzalez, Commission, dated May 
19, 2014 (``FINRA Response''). The FINRA Response and the text of 
Partial Amendment No. 1 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. The FINRA Response is also 
available on the Commission's Web site at http://www.sec.gov.
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    The Commission is publishing this notice and order to solicit 
comments on Partial Amendment No. 1 from interested persons and to 
institute proceedings pursuant to Section 19(b)(2)(B) of the Act \9\ to 
determine whether to approve or disapprove the proposed rule change as 
modified by Partial Amendment No. 1.
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    \9\ 15 U.S.C. 78s(b)(2)(B).
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    Institution of proceedings does not indicate that the Commission 
has reached any conclusions with respect to the proposed rule change, 
nor does it mean that the Commission will ultimately disapprove the 
proposed rule change. Rather, as discussed below, the Commission seeks 
additional input from interested parties on the proposed rule change, 
as modified by Partial Amendment No. 1, and issues presented by the 
proposal.

II. Description of the Proposed Rule Change

    As further described in the Notice of Filing, FINRA is proposing to 
amend Rule 12104 of the Customer Code and Rule 13104 of the Industry 
Code to broaden arbitrators' authority to make referrals during an 
arbitration proceeding. Under the current proposal, an arbitrator would 
be permitted to make a mid-case referral if the arbitrator becomes 
aware of any matter or conduct that the arbitrator has reason to 
believe poses a serious ongoing or imminent threat that is likely to 
harm investors. A mid-case referral could not be based solely on 
allegations in the pleadings. The proposed rule change would further 
provide that when a case is nearing completion, the arbitrator should 
wait until the case concludes to make a referral if, in the 
arbitrator's judgment, investor protection would not be materially 
compromised by the delay. If an arbitrator makes a mid-case referral, 
the Director would disclose the act of making the referral to the 
parties, and a party would be permitted to request recusal of the 
referring arbitrator. The proposal would require either the President 
or the Director to evaluate the referral and determine whether to 
forward it to other divisions of FINRA for further review. Finally, the 
proposal would retain the provision in Rule 12104(b) of the Customer 
Code and Rule 13104(b) of the Industry Code that permits an arbitrator 
to make a post-case referral.

III. Discussion of Public Comments on the Proposed Rule

    The Commission received ten comment letters \10\ on the current 
proposal, two of which support the

[[Page 30208]]

current proposal; \11\ three of which support the goal of the current 
proposal, but seek some modifications; \12\ and five of which oppose 
the current proposal.\13\ Supporters believe that permitting 
arbitrators to make mid-case referrals would be beneficial for public 
investors \14\ and help FINRA to detect and respond to ongoing fraud 
more quickly.\15\ Other commenters, however, raised concerns regarding 
various aspects of the proposal. For example, some commenters suggested 
that a referral would lead to requests for recusals or challenges to 
awards because of perceived bias, and that investors would be unfairly 
burdened by disruptions in arbitration proceedings that might result 
from an arbitrator making a mid-case referral and receiving a recusal 
request.\16\ Commenters suggested different approaches, including 
requiring FINRA or the party that requested recusal to compensate an 
investor whose case is disrupted by a mid-case referral that leads to 
one or more arbitrators recusing themselves,\17\ explicitly excluding 
referrals as a basis for recusal of an arbitrator or panel,\18\ and 
excluding referrals as a basis for challenging an award.\19\ Some 
commenters suggested that the proposed rule would offer limited help to 
FINRA to uncover fraud \20\ and would negatively affect investors if a 
mid-case referral could be used as grounds to request recusal of an 
arbitrator \21\ or to challenge the arbitration award.\22\ Other 
commenters suggested that the proposed rule would compromise the 
integrity of the arbitration process and arbitrator neutrality.\23\ On 
May 19, 2014, FINRA responded to the comments \24\ and filed Partial 
Amendment No. 1 to the proposed rule change. The Commission is 
considering FINRA's response and Partial Amendment No. 1, both of which 
are in the public comment file for this rule filing.
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    \10\ See note 7, supra.
    \11\ See Caruso and Friedman.
    \12\ See GSU, PACE, and Cornell.
    \13\ See PIABA, Berne, Nelson, St. John's, and Ryder.
    \14\ See Caruso.
    \15\ See Friedman.
    \16\ See Berne, PIABA, GSU, PACE, Nelson, St. John's, and Ryder.
    \17\ See PIABA.
    \18\ See PACE and Cornell.
    \19\ See Cornell.
    \20\ See St. John's, Nelson, PIABA.
    \21\ See PACE, GSU, and Cornell.
    \22\ See Cornell.
    \23\ See Berne, Nelson, Ryder, and St. John's.
    \24\ See FINRA Response, note 8, supra.
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IV. escription of Partial Amendment No. 1

    On May 19, 2014, FINRA proposed in Partial Amendment No. 1 that a 
party that wishes to request recusal of an arbitrator following a mid-
case referral must do so within three days of being notified of the 
referral. FINRA believes that Partial Amendment No. 1 would prevent a 
party from receiving notice of the mid-case referral and reserving the 
right to strategically request recusal when it would best benefit that 
party.

V. Proceedings to Determine Whether to Approve or Disapprove SR-FINRA-
2014-005 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether to approve or disapprove 
the proposed rule change.\25\ Institution of such proceedings appears 
appropriate at this time in view of the legal and policy issues raised 
by the proposal. As noted above, institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the proposed rule change, 
as modified by Partial Amendment No. 1, and to provide the Commission 
with arguments to support the Commission's analysis as to whether to 
approve or disapprove the proposal, as amended.
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    \25\ 15 U.S.C. 78s(b)(2). Section 19(b)(2)(B) of the Act 
provides that proceedings to determine whether to approve or 
disapprove a proposed rule change must be concluded within 180 days 
of the date of publication of notice of the filing of the proposed 
rule change. The time for conclusion of the proceedings may be 
extended for up to an additional 60 days if the Commission 
determines that a longer period is appropriate and publishes its 
reasons for so finding or if the self-regulatory organization that 
filed the proposed rule change consents to the extension.
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    Pursuant to Section 19(b)(2)(B) of the Act,\26\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
Section 15A(b)(6) of the Act\27\ 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. The 
Commission believes FINRA's proposed rule change, as amended, raises 
questions as to whether it is consistent with the requirements of 
Section 15A(b)(6) of the Act.
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    \26\ 15 U.S.C. 78s(b)(2)(B).
    \27\ 15 U.S.C. 78o-3(b)(6).
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VI. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect any issues 
raised by the proposed rule change, as modified by Partial Amendment 
No. 1. In particular, the Commission invites the written views of 
interested persons concerning (1) any issues related to the changes 
made to the proposal by Partial Amendment No. 1 and (2) whether the 
proposed rule change, as modified by Partial Amendment No. 1, is 
consistent with Section 15A(b)(6) of the Act. The Commission also 
requests comment on the issues raised by FINRA's response to comments.
    In addition, the Commission requests that interested persons 
provide written submissions of their views, data, and arguments with 
respect to questions raised by commenters about the potentially adverse 
consequences of the proposal for retail investors whose cases may be 
delayed or disrupted by a mid-case referral. These questions include:
     Would the proposal adversely affect retail investors? If 
so, how?
     Should FINRA propose a different standard for referral? If 
so, what standard(s) would be appropriate?
     Does Partial Amendment No. 1 ameliorate commenters' 
concerns that notifying parties of a mid-case referral could lead to 
adverse consequences to the claimant, including requests for recusal 
and challenges to an award? If not, should FINRA amend the proposal to 
preclude the Director, or anyone else, from notifying the parties of a 
referral?
    Although there do not appear to be any issues relevant to approval 
or disapproval that would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4(g) promulgated under the Act, any request for an opportunity 
to make an oral presentation.\28\
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    \28\ See Section 19(b)(2) of the Act, as amended by the 
Securities Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 
(1975), grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See also Securities Acts 
Amendments of 1975, Report of the Senate Committee on Banking, 
Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th 
Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments by June 26, 2014 concerning whether the proposed rule change, 
as modified by Partial Amendment No. 1, should be approved or 
disapproved. Any person who wishes to file a rebuttal to any other 
person's submission must file that rebuttal by July 11, 2014. Comments 
may be submitted by any of the following methods:

[[Page 30209]]

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-2014-005 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2014-005. 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 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principle 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 publicly available.
    All submissions should refer to File Number SR-FINRA-2014-005 and 
should be submitted on or before June 26, 2014. If comments are 
received, any rebuttal comments should be submitted by July 11, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
Kevin M. O'Neill,
Deputy Secretary.
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    \29\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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[FR Doc. 2014-12075 Filed 5-23-14; 8:45 am]
BILLING CODE 8011-01-P


