
[Federal Register Volume 80, Number 245 (Tuesday, December 22, 2015)]
[Notices]
[Pages 79632-79636]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32051]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76670; File No. SR-FINRA-2015-034]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Merge FINRA 
Dispute Resolution, Inc. Into and With FINRA Regulation, Inc.

December 16, 2015.

I. Introduction

    On September 29, 2015, 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 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to merge its dispute resolution 
subsidiary, FINRA Dispute Resolution, Inc. (``FINRA Dispute 
Resolution'') into and with its regulatory subsidiary, FINRA 
Regulation, Inc. (``FINRA Regulation''), and to amend the Plan of 
Allocation and Delegation of Functions by NASD to Subsidiaries 
(``Delegation Plan'') and the By-Laws of FINRA Regulation (``FINRA 
Regulation By-Laws''); delete the By-Laws of FINRA Dispute Resolution 
(``FINRA Dispute Resolution By-Laws''); and make conforming amendments 
to FINRA rules in order to implement the merger. In addition, the 
proposed rule change would amend the FINRA Regulation By-Laws to 
increase the total number of directors who could serve on the FINRA 
Regulation board. The proposed rule change was published for comment in 
the Federal Register on October 13, 2015.\3\ The Commission received 
five comment letters on the proposed rule change.\4\ On December 1, 
2015, \5\ the Commission received a response to the comments from 
FINRA.\6\ 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 Securities Exchange Act Release No. 76082 (October 6, 
2015), 80 FR 61545 (``Notice'').
    \4\ See letters from Hugh D. Berkson, President, Public 
Investors Arbitration Bar Association, dated November 3, 2015 
(``PIABA Letter''); Ron A. Rhoades, dated November 3, 2015 
(``Rhoades Letter''); Jill Gross, Director, Pace Investor Rights 
Clinic, Pace Law School, dated November 3, 2015 (``PIRC Letter''); 
Larry A. Tawwater, President, American Association for Justice, 
dated November 3, 2015 (``AAJ Letter''); and William A. Jacobson, 
Director, Cornell Securities Law Clinic, Cornell Law School, dated 
November 4, 2015 (``CSLC Letter'').
    \5\ See Securities Exchange Act Release No. 76444 (November 16, 
2015), 80 FR 72775 (November 20, 2015) extending the time for the 
Commission to act on the proposed rule change.
    \6\ See letter from Meredith Cordisco, Assistant General 
Counsel, FINRA, dated December 1, 2015 (``FINRA Letter'').
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II. Description of the Proposed Rule Change

    FINRA has proposed to merge FINRA Dispute Resolution into FINRA 
Regulation. To implement the merger, FINRA proposes to make conforming 
amendments to the Delegation Plan, amend the FINRA Regulation By-Laws 
to incorporate substantive and unique provisions from the FINRA Dispute 
Resolution By-Laws and to make other conforming amendments, delete the 
FINRA Dispute Resolution By-Laws in their entirety, and make conforming 
amendments to FINRA rules.\7\ FINRA

[[Page 79633]]

represents that its dispute resolution program would continue to 
operate as a separate department within FINRA Regulation, and it would 
be referred to as the Office of Dispute Resolution. FINRA has also 
proposed to amend the FINRA Regulation By-Laws to increase the total 
number of directors who could serve on the FINRA Regulation board.
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    \7\ The current FINRA rulebook consists of: (1) FINRA Rules; (2) 
NASD Rules; and (3) rules incorporated from New York Stock Exchange 
LLC (``NYSE'') (``Incorporated NYSE Rules'') (together, the NASD 
Rules and Incorporated NYSE Rules are referred to as the 
``Transitional Rulebook''). While the NASD Rules generally apply to 
all FINRA members, the Incorporated NYSE Rules apply only to those 
members of FINRA that are also members of the NYSE (``Dual 
Members''). The FINRA Rules apply to all FINRA members, unless such 
rules have a more limited application by their terms. For more 
information about the rulebook consolidation process, see 
Information Notice, March 12, 2008 (Rulebook Consolidation Process).
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A. Delegation Plan

    FINRA proposed to delete Section III of the Delegation Plan, which 
delegates responsibilities and functions to FINRA Dispute Resolution, 
and to amend Section II of the Delegation Plan, which delegates 
responsibilities and functions to FINRA Regulation, to incorporate 
several of the provisions from Section III that apply to dispute 
resolution. Specifically, FINRA proposed to amend Section II of the 
Delegation Plan to provide FINRA Regulation with the authority to 
establish and interpret rules and regulations regarding dispute 
resolution programs; develop and adopt appropriate and necessary rule 
changes relating to the dispute resolution forum; conduct arbitrations, 
mediations, and other dispute resolution programs; establish and assess 
fees and other charges on FINRA members, persons associated with 
members, and others using the dispute resolution forum; and manage 
external relations on dispute resolution. In addition, FINRA proposed 
to incorporate in its entirety current Section III(C)(1) of the 
Delegation Plan, which governs the National Arbitration and Mediation 
Committee (``NAMC''), into Section II(C) of the Delegation Plan.\8\ 
FINRA states that the NAMC's authority, role and responsibilities would 
not change under the proposed rule change.\9\
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    \8\ Under the proposed rule change, the FINRA Regulation board 
would appoint the NAMC and the NAMC would have the authority to 
advise the FINRA Regulation board on issues relating to dispute 
resolution.
    \9\ See Notice, supra note 3, at 61548.
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    In addition, FINRA proposed to make other technical and conforming 
changes throughout the Delegation Plan.\10\
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    \10\ See Notice, supra note 3, at 61547-48 for the list of these 
changes.
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B. Amendments to the FINRA Regulation By-Laws; Deletion of FINRA 
Dispute Resolution By-Laws

    FINRA proposed to amend the FINRA Regulation By-Laws to incorporate 
substantive and unique provisions from the FINRA Dispute Resolution By-
Laws and, consequently, to delete the FINRA Dispute Resolution By-Laws 
in their entirety. FINRA has represented that where differences exist 
in the FINRA Dispute Resolution By-Laws that would not be incorporated 
into the FINRA Regulation By-Laws under the proposed rule change, the 
differences are non-substantive or would not otherwise affect the 
governance or operation of the dispute resolution program.\11\ 
Specifically, FINRA proposed to amend the FINRA Regulation By-Laws to: 
(i) Expand the definition of ``FINRA member'' for purposes of the Codes 
of Arbitration Procedure to include ``any broker or dealer admitted to 
membership in FINRA, whether or not the membership has been terminated 
or cancelled; and any broker or dealer admitted to membership in a 
self-regulatory organization that, with FINRA consent, has required its 
members to arbitrate pursuant to the Code of Arbitration Procedure for 
Customer Disputes or the Code of Arbitration Procedure for Industry 
Disputes and/or to be treated as members of FINRA for purposes of the 
Codes of Arbitration Procedure, whether or not the membership has been 
terminated or cancelled;'' and (ii) amend the definitions of ``Industry 
Member'' and ``Public Member'' to clarify that, for purposes of 
determining membership on the NAMC, acting in the capacity as a 
mediator of disputes involving a person and not representing any party 
in such mediations would not be considered professional services 
provided to, in the case of the term ``Industry Member,'' or a material 
business relationship with, in the case of the term ``Public Member,'' 
such persons.
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    \11\ See Notice, supra note 3, at 61548.
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    In addition, FINRA is proposing to amend Section 4.2 of the FINRA 
Regulation By-Laws to increase the total number of directors who could 
serve on the FINRA Regulation board from 15 to 17. FINRA states that 
members of the FINRA Board's Regulatory Policy Committee currently 
serve as the directors of the board of FINRA Regulation.\12\ 
Accordingly, in appointing governors of the FINRA Board to the 
Regulatory Policy Committee, FINRA must adhere to the compositional 
requirements for the Board of Directors of FINRA Regulation.\13\ FINRA 
states that increasing the maximum number of FINRA Regulation board 
seats would provide it with additional flexibility to manage its board 
committee assignments and meet the compositional requirements under the 
FINRA Regulation By-Laws.\14\
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    \12\ See Notice, supra note 3, at 61549.
    \13\ See Article IV, Section 4.3(a) of the FINRA Regulation By-
Laws, which provides, among other things, that the FINRA Regulation 
board must consist of at least two and not less than 20 percent of 
directors who are Small Firm, Mid-Size Firm or Large Firm Governors, 
and that a majority of the FINRA Regulation board must be public 
directors.
    \14\ See Notice, supra note 3, at 61549.
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    FINRA proposed to make other conforming and technical amendments to 
the FINRA Regulation By-Laws.\15\
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    \15\ See Notice, supra note 3, at 61548-50.
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C. Amendments to the FINRA Rules

    FINRA proposed to amend several FINRA rules in connection with the 
proposed merger of FINRA Dispute Resolution into FINRA Regulation to, 
among other things, delete references to FINRA Dispute Resolution; add 
a definition of ``FINRA Regulation;'' change references to 
``subsidiaries'' or ``subsidiary'' to ``FINRA Regulation;'' remove 
references to Section III of the Delegation Plan, which pertains to 
FINRA Dispute Resolution, and change the language to reference FINRA 
Regulation; and replace references to ``Dispute Resolution'' with 
``Regulation.''
    In addition, in connection with the merger, FINRA proposed to 
rename FINRA Dispute Resolution as the Office of Dispute Resolution. As 
discussed above, the Office of Dispute Resolution would become a 
separate department within FINRA Regulation that would continue to 
administer FINRA's existing dispute resolution programs. Accordingly, 
the proposed rule change would add a definition of ``Office of Dispute 
Resolution'' to FINRA's rules and amend various FINRA rules to replace 
certain references to ``Dispute Resolution'' with ``Office of Dispute 
Resolution.''
    Upon completion of the merger, the position of President of FINRA 
Dispute Resolution would no longer exist, therefore FINRA proposed to 
delete references to the President of FINRA Dispute Resolution from its 
Rules.\16\
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    \16\ See Rules 10103 (Director of Arbitration), 10312 
(Disclosures Required of Arbitrators and Director's Authority to 
Disqualify), 12103 (Director of Dispute Resolution), 12104 (Effect 
of Arbitration on FINRA Regulatory Activities; Arbitrator Referral 
During or at Conclusion of Case), 12203 (Denial of FINRA Forum), 
12407 (Removal of Arbitrator by Director), 13103 (Director of 
Dispute Resolution), 13104 (Effect of Arbitration on FINRA 
Regulatory Activities; Arbitrator Referral During or at Conclusion 
of Case), 13203 (Denial of FINRA Forum) and 13410 (Removal of 
Arbitrator by Director). Any authority formerly granted by those 
rules to the President of FINRA Dispute Resolution would be deleted 
in its entirety or granted solely to the Director of the Office of 
Dispute Resolution, except that in amended Rules 10103 (Director of 
Arbitration), 12103 (Director of Dispute Resolution) and 13103 
(Director of Dispute Resolution), the authority to appoint an 
interim Director if the Director is unable to perform his duties 
would be granted to the President of FINRA Regulation. FINRA also 
proposed to delete references to an Executive Vice President of 
FINRA Dispute Resolution from Rule 10103.

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[[Page 79634]]

III. Comment Letters and FINRA's Response

    The Commission received four comment letters opposing the proposed 
rule change \17\ and one comment letter expressing concerns regarding 
the proposed rule change.\18\ In general, commenters believe that FINRA 
Dispute Resolution should remain separate from FINRA Regulation in 
order to maintain the independence and autonomy of the dispute 
resolution forum.\19\ One commenter states that the proposed merger is 
contrary to the stated purpose of maintaining a neutral and independent 
dispute resolution program, would damage the credibility of the FINRA 
arbitration program, and would ``create even more public perception 
that the forum serves the purposes of the securities industry.'' \20\ 
Another commenter states that the proposed merger would negatively 
affect investors' perceptions of the neutrality and fairness of FINRA's 
dispute resolution forum.\21\ Further, one commenter argues that it is 
important FINRA Dispute Resolution ``be able to adopt its own policies, 
determine the appropriate allocation of its resources, and manage its 
external relations'' and ``that the NAMC remain separate and apart from 
[FINRA] Regulation.'' \22\
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    \17\ See PIABA Letter, Rhoades Letter, PIRC Letter, and CSLC 
Letter. One commenter that opposes the proposed merger argues that 
arbitration should be independent of FINRA altogether and should be 
conducted by an independent arbitration forum such as the American 
Arbitration Association. See Rhoades Letter. FINRA stated that it 
believes, and the Commission agrees, that this comment is beyond the 
scope of the proposed rule change. See FINRA Letter at 1, n.4.
    \18\ See AAJ Letter.
    \19\ See, e.g., PIABA Letter at 3-4; PIRC Letter. Two commenters 
believe that the proposed rule change contradicts previous 
statements made by FINRA (formerly NASD) and the Commission when 
NASD first proposed, and the Commission approved, a separate dispute 
resolution subsidiary. See PIABA Letter at 2-3 (citing Securities 
Exchange Act Release Nos. 41510 (June 10, 1999), 64 FR 32575 (June 
17, 1999) (SR-NASD-99-21) (notice of proposed rule change to create 
a dispute resolution subsidiary); and 41971 (September 30, 1999), 64 
FR 55793 (October 14, 1999) (SR-NASD-99-21) (order approving 
proposed rule change to create a dispute resolution subsidiary). See 
also PIRC Letter.
    \20\ See CSLC Letter.
    \21\ See PIRC Letter.
    \22\ See PIABA Letter at 4.
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    In addition, two commenters believe FINRA's justifications for the 
proposed merger are conclusory \23\ and one commenter believes the 
proposal lacks detail to support the changes being made.\24\ PIABA 
states that it finds troubling FINRA's statements that the proposed 
merger would better align FINRA's legal structure with the public's 
perception as well as its operational realities.\25\ PIABA argues that 
any public confusion regarding the distinct nature of FINRA Regulation 
and FINRA Dispute Resolution results from FINRA's failure to adequately 
explain to the public the different roles of each entity, and that 
FINRA should take steps to improve the public's understanding that 
FINRA Dispute Resolution is separate and independent from FINRA 
Regulation, which the commenter believes would improve the confidence 
level of forum users.\26\ In addition, PIABA argues that if FINRA has 
not been operating FINRA Dispute Resolution and FINRA Regulation as two 
separate and distinct entities, it should take steps to do so rather 
than merging the entities.\27\
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    \23\ See PIABA Letter and PIRC Letter.
    \24\ See AAJ Letter.
    \25\ See PIABA Letter at 3.
    \26\ See PIABA Letter at 3-4.
    \27\ Id.
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    In response, FINRA notes that it ``does not need to maintain 
separate corporate entities in order to provide a fair, neutral and 
efficient dispute resolution forum.'' \28\ FINRA states that FINRA, 
FINRA Regulation, and FINRA Dispute Resolution largely function as a 
single organization today in that the entities currently share many 
administrative and support functions; FINRA Dispute Resolution remains 
financially dependent on the FINRA enterprise; and the rules, 
administrative processes, and leadership of the entities are largely 
integrated.\29\ FINRA argues that ``the significant commonalities and 
shared resources between the corporate entities serve to benefit the 
dispute resolution forum and its users.'' \30\
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    \28\ See FINRA Letter at 3.
    \29\ See FINRA Letter at 2-3. For example, FINRA notes that 
FINRA Dispute Resolution staff ``works closely with the Department 
of Enforcement and FINRA's operating departments to identify 
misconduct by individuals or firms involved in arbitration cases 
that might merit further investigation or action to ensure 
protection of the investing public'' and that FINRA's procedural 
rules ``specifically provide that if a FINRA arbitration panel 
issues an award in favor of the claimant, and the member firm or 
associated person fails to comply with the award or related 
settlement, FINRA has the authority to suspend or cancel the 
membership of the firm or suspend the associated person for such 
non-compliance.'' Id. at 3 (citing FINRA By-Laws, Article VI, 
Section 3, and FINRA Rule 9554).
    \30\ See FINRA Letter at 2.
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    In addition, FINRA states that it retained and incorporated into 
FINRA Regulation's operations, the unique elements of the dispute 
resolution program that ``strengthen its operations and enhance the 
fairness and neutrality of the forum.'' \31\ Following the merger, the 
NAMC, an advisory committee on arbitration matters currently maintained 
by FINRA Dispute Resolution, would continue under FINRA Regulation in 
``both its current form (including the requirement that non-industry 
members compose at least 50 percent of the NAMC) and function 
(providing input that would shape the forum's rules, policies and 
procedures).'' \32\ FINRA states that the NAMC ``is a key component to 
maintaining a fair and efficient forum.'' \33\
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    \31\ Id. at 3.
    \32\ Id. at 3-4.
    \33\ Id. at 4.
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    Moreover, FINRA states that the merger would not have a practical 
effect on corporate governance of the dispute resolution forum as 
members of the FINRA Board's Regulatory Policy Committee, who currently 
serve as the directors of the boards of both FINRA Regulation and FINRA 
Dispute Resolution,\34\ would continue to serve as directors of the 
board of the merged entity, ``thereby ensuring fair representation of 
FINRA's constituents in the administration of the dispute resolution 
program.'' \35\ In addition, FINRA notes that the governance structure 
would continue to consist of a majority of public board members, 
``which helps to ensure that FINRA receives input on the forum's 
proposed rules, policies and procedures from those whose backgrounds 
and affiliations are not connected to the industry.'' \36\
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    \34\ FINRA states that ``overlapping board membership was 
contemplated at the time it sought to create the dispute resolution 
subsidiary as a way to provide stability and uniformity among the 
corporate entities.'' See FINRA Letter at 4 (citing Securities 
Exchange Act Release No. 41510, 64 FR 32575, 32586 (June 17, 1999) 
(Notice of Filing of File No. SR-NASD-99-21)).
    \35\ See FINRA Letter at 4. FINRA notes that the proposed rule 
change would amend the FINRA Regulation corporate governance 
structure to add two board seats, ``which would provide FINRA with 
additional flexibility to manage its board committee assignments and 
meet the compositional requirements under the FINRA Regulation By-
Laws.'' Id. at n. 13.
    \36\ Id. at 4.
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    FINRA states that following the merger, FINRA's dispute resolution 
program will continue to function as a separate department within FINRA 
Regulation, and will be overseen by the Director of the Office of 
Dispute Resolution, who will be responsible for managing the day-to-day 
operations of the dispute resolution program.\37\ FINRA also points out 
that the merger will have no effect on its current regulatory 
oversight, noting that it will still be subject to the rule filing 
requirements of the Act and to

[[Page 79635]]

inspections by the Commission.\38\ FINRA argues that this ``robust 
regulatory framework serves to ensure that FINRA manages and 
administers the forum in a manner that is fair and protects investors 
and the public interest.'' \39\
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    \37\ Id. at 5.
    \38\ Id.
    \39\ Id.
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    FINRA also states that it ``does not believe that the merger would 
impact public perception of fairness of the forum'' because FINRA, 
FINRA Regulation and FINRA Dispute Resolution appear to the public to 
be a single organization and, furthermore, the merger will not affect 
the services and benefits provided by, or the costs to use, the dispute 
resolution forum, or its corporate governance or oversight.\40\ In 
addition, FINRA ``does not believe it would be relevant or helpful, as 
PIABA suggests, for FINRA to engage in educational efforts regarding 
the existing corporate distinction'' between the entities, as 
``maintaining a separate corporate entity does not contribute to the 
fairness or efficiency of operating the forum.'' \41\ FINRA notes, 
however, that it ``continuously engages in efforts to educate the 
investing public about the services and benefits of its dispute 
resolution forum, including the fairness and neutrality of the forum.'' 
\42\ FINRA also states that it ``has made many enhancements to the 
dispute resolution program since the establishment of FINRA Dispute 
Resolution that are wholly unrelated to its corporate structure[,]'' 
such as allowing investors to have an all public arbitration panel, and 
it ``is continuously looking at ways to strengthen the dispute 
resolution process and would continue to work closely with investors, 
members, and other interested parties in such efforts, irrespective of 
FINRA's corporate structure.'' \43\
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    \40\ Id.
    \41\ Id.
    \42\ Id.
    \43\ Id. at 6. For example, last year, FINRA formed the Dispute 
Resolution Task Force to consider possible enhancements to the forum 
to improve the effectiveness, transparency, impartiality and 
efficiency of FINRA's securities arbitration forum for all 
participants.
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    PIABA states that there may be unintended consequences of merging 
FINRA Dispute Resolution into FINRA Regulation, specifically 
questioning whether a decision by FINRA Enforcement to decline to take 
action against a member for conduct that is the subject of a pending 
arbitration could be used as defensive evidence in an arbitration 
proceeding.\44\ FINRA noted that this issue exists irrespective of the 
proposed merger and that it has previously stated that its 
determination not to take enforcement action against a member has no 
evidentiary weight in a subsequent proceeding.\45\ FINRA also states 
that it considers it unethical and potentially misleading to suggest to 
an adjudicator or mediator that FINRA's determination is probative 
evidence in a dispute on the merits of a related claim.\46\
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    \44\ See PIABA Letter at 4.
    \45\ See FINRA Letter at 6-7 (citing Notice to Members 02-53 at 
509 (August 2002) (NASD Files Proposal to Amend Rule 3070 to Require 
Filing of Criminal and Civil Complaints and Arbitration Claims with 
NASD; Revises Letters Sent When Determination Made to Close an 
Investigation Without Further Action)).
    \46\ Id.
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    One commenter states that FINRA did not provide a cost-benefit 
analysis or quantify the administrative savings that will result from 
the merger or state what it will do with these savings.\47\ In 
response, FINRA states that proposed rule change would allow for more 
efficient use of FINRA's administrative resources resulting from the 
elimination of numerous tax and other regulatory filings each year.\48\ 
While FINRA does not expect the cost savings to have a material effect 
on its budget or the costs of forum-related services, FINRA believes it 
is nevertheless prudent for FINRA to ``streamline its operational 
procedures and re-allocate staff involved in such processes to other 
matters,'' which will enhance the efficient operation of FINRA, in turn 
benefitting those who are governed by, and those who use, FINRA's 
services.\49\
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    \47\ See PIABA Letter at 4.
    \48\ See FINRA Letter at 7. For example, FINRA states that the 
merger would eliminate the need to file numerous tax filings each 
year, including multiple state tax and information returns, sales 
tax returns, property tax returns, as well as many state 
registrations and annual reports, and also would eliminate a 
separate payroll entity, eliminating the need for separate 
compensation and accounting protocols. See id. at 2.
    \49\ See FINRA Letter at 7.
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    Two commenters believe that the comment period for the proposed 
rule change was too short to allow interested parties to fully evaluate 
the proposal and provide comments.\50\ FINRA argues that interested 
parties were provided with sufficient time to comment on the 
proposal.\51\ In this regard, FINRA notes that it adhered to the 
procedures set forth in Section 19 of the Act for self-regulatory 
organizations to file proposed rule changes with the Commission and 
that the Commission adhered to standard practices with respect to the 
proposed rule change by providing a 21 day comment period following 
publication of notice of the proposed rule change in the Federal 
Register.\52\
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    \50\ See PIABA Letter at 1 and AAJ Letter at 1.
    \51\ See FINRA Letter at 7-8.
    \52\ Id.
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IV. Discussion and Commission Findings

    After careful review of the proposed rule change, the comment 
letters, and FINRA's response to the comments, the Commission finds 
that the proposed rule change is consistent with the requirements of 
the Act and the rules and regulations thereunder that are applicable to 
a national securities association.\53\ Specifically, the Commission 
finds that the proposed rule change is consistent with Section 
15A(b)(6) of the Act,\54\ which requires, among other things, that 
FINRA's rules 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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    \53\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \54\ 15 U.S.C. 78o-3(b)(6).
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    The Commission recognizes that commenters raised concerns that in 
approving the current proposal, the Commission would be contradicting 
its prior findings when it approved the creation of Dispute Resolution 
as a separate subsidiary.\55\ The Commission notes, however, that FINRA 
is not required to maintain separate corporate entities, nor will the 
maintenance of separate corporate entities ensure a fair, neutral and 
efficient dispute resolution forum. FINRA represents that while the 
proposed rule change would alter FINRA Dispute Resolution's corporate 
status, it would not affect the services and benefits provided by, or 
costs to use, the dispute resolution forum, its corporate governance, 
or oversight.\56\ Moreover, the FINRA Regulation board, like the FINRA 
Dispute Resolution board, will continue to consist of members of the 
FINRA Board's Regulatory Policy Committee and a majority of the members 
will continue to be public board members. Further, following the 
merger, the NAMC, which

[[Page 79636]]

was maintained by FINRA Dispute Resolution before the merger, will be 
maintained by FINRA Regulation, and the composition of the NAMC will 
not change. At least 50 percent of the members must be non-industry 
members. The Commission believes that the foregoing should help to 
ensure the maintenance of a fair and neutral forum.
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    \55\ See supra note 19.
    \56\ See Notice, supra note 3, at 61546 n.8. According to FINRA, 
FINRA Dispute Resolution remains financially dependent on the FINRA 
enterprise, as fees received from parties who use the arbitration 
and mediation programs are not sufficient to fund the forum's 
arbitration and mediation activities at current cost levels. FINRA 
represents that following the merger, FINRA will continue to 
supplement the fees collected from users, as necessary, to maintain 
a cost effective forum. See FINRA Letter at 3. The Commission 
expects FINRA to ensure that the Office of Dispute Resolution is 
adequately funded and able to fulfill its responsibilities.
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    With respect to concerns raised by commenters regarding the public 
perception of fairness if the merger is approved, the Commission notes 
that the dispute resolution forum will continue to be subject to the 
same Commission oversight as other departments of FINRA, which includes 
the requirement to file all rule changes, which include changes to the 
By-Laws, with the Commission,\57\ and the forum will continue to be 
subject to inspections by the Commission and by the Government 
Accountability Office, which performs audits at the request of the 
United States Congress.\58\ In addition, the Commission expects FINRA 
to continue to work closely with investors, members, and other 
interested parties in looking at ways to strengthen the dispute 
resolution process and serve the needs of the investing public, and to 
consider any recommendations raised by its Dispute Resolution Task 
Force \59\ for improving the effectiveness, transparency, impartiality 
and efficiency of its arbitration forums.
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    \57\ The arbitration program and services will continue to be 
governed by the FINRA Codes of Arbitration Procedure and the 
mediation program and services by the FINRA Code of Mediation 
Procedure. See FINRA Rule 12000, 13000 and 14000 Series.
    \58\ See Notice, supra note 3, at 61547. Moreover, FINRA has 
represented that a decision not to take enforcement action against a 
member has no evidentiary weight and further, that FINRA would 
consider it unethical and potentially misleading to suggest that 
such a determination is probative evidence in a dispute on the 
merits of a related claim.
    \59\ See supra note 43.
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    PIABA also questioned the actual cost savings generated by the 
proposed merger. FINRA indicated that the merger will reduce 
unnecessary administrative burdens that result from the need to 
maintain separate legal entities, such as costs and resources 
associated with complying with multiple-entity regulatory and tax 
filings and maintaining separate accounting protocols. The merger will 
allow FINRA to streamline its operational procedures and re-allocate 
staff involved in such processes, which should make FINRA's operations 
more efficient.
    FINRA states that the increase to the maximum number of FINRA 
Regulation board seats from 15 to 17 will provide it with additional 
flexibility to manage its board committee assignments and meet the 
compositional requirements under the FINRA Regulation By-Laws. The 
Commission notes that following the increase, the FINRA Regulation 
board compositional requirements will continue to provide for the fair 
representation of FINRA's members and the numerical dominance of public 
directors, consistent with the requirements of the Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\60\ that the proposed rule change (SR-FINRA-2015-034), be, and 
hereby is, approved.
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    \60\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\61\
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    \61\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-32051 Filed 12-21-15; 8:45 am]
BILLING CODE 8011-01-P


