
[Federal Register Volume 82, Number 178 (Friday, September 15, 2017)]
[Notices]
[Pages 43436-43439]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-19582]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81572; File No. SR-FINRA-2017-025]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change Relating to the 
Definition of Non-Public Arbitrator

September 11, 2017.

I. Introduction

    On July 10, 2017, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend FINRA Rule 12100 of the 
Code of Arbitration Procedure for Customer Disputes (``Customer Code'') 
and FINRA Rule 13100 of the Code of Arbitration Procedure for Industry 
Disputes (``Industry Code'' and, together with the Customer Code, 
``Codes''). The proposed rule change would permit any person who is 
disqualified from service as a public arbitrator, but otherwise 
qualified to serve as an arbitrator, to serve as a non-public 
arbitrator.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on July 28, 2017.\3\ The public comment period closed on 
August 18, 2017. The Commission received four comment letters in 
response to the Notice, all of which supported the proposed rule 
change.\4\ On August 30, 2017, FINRA responded to the comment letters 
received in response to the Notice.\5\ This order approves the proposed 
rule change.
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    \3\ See Exchange Act Release No. 81196 (July 24, 2017), 82 FR 
35248 (July 28, 2017) (File No. SR-FINRA-2017-025) (``Notice'').
    \4\ See Letters from Steven B. Caruso, Maddox Hargett Caruso, 
P.C., dated July 24, 2017 (``Caruso Letter''); Glenn S. Gitomer, 
McCausland Keen + Buckman, dated August 14, 2017 (``Gitomer 
Letter''); Jill Gross, Professor of Law and Former Director, and 
Elissa Germaine, Supervising Attorney, Adjunct Professor of Law, and 
Director, Pace Law School's Investor Rights Clinic, dated August 17, 
2017 (``Pace Letter''); Marnie C. Lambert, President, Public 
Investors Arbitration Bar Association (``PIABA''), dated August 18, 
2017 (``PIABA Letter''). Comment letters are available at https://www.sec.gov.
    \5\ See Letter from Margo A. Hassan, Associate Chief Counsel, 
FINRA, to Brent J. Fields, Secretary, U.S. Securities and Exchange 
Commission, dated August 30, 2017 (``FINRA Letter''). The FINRA 
Letter is available on FINRA's Web site at http://www.finra.org, at 
the principal office of FINRA, at the Commission's Web site at 
https://www.sec.gov, and at the Commission's Public Reference Room.
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II. Description of the Proposed Rule Change \6\
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    \6\ The subsequent description of the proposed rule change is 
substantially excerpted from FINRA's description in the Notice. See 
Notice, 82 FR at 35249.
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    FINRA classifies arbitrators under the Codes as either ``non-
public'' or ``public.'' The non-public arbitrator definition lists 
affiliations that might qualify a person to serve as a non-public 
arbitrator at the forum.\7\ Conversely, the public arbitrator 
definition describes criteria that disqualify an applicant from 
inclusion on the public arbitrator roster.\8\
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    \7\ See FINRA Rules 12100(r) and 13100(r).
    \8\ See FINRA Rules 12100(y) and 13100(x).
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    In 2015, the Commission approved amendments to the definitions of 
non-public arbitrator and public arbitrator in the Codes (``2015 
amendments'').\9\ Among other things, the 2015 amendments: (i) Provided 
that persons who worked in the financial industry for any duration 
during their careers would always be classified as non-public 
arbitrators; (ii) added new disqualifications to the public arbitrator 
definition relating to an arbitrator's provision of services to parties 
in securities arbitration and litigation and to revenues earned from 
the financial industry by an arbitrator's co-workers; and (iii) 
broadened the disqualifications to the public arbitrator definition 
based on the activities or affiliations of an arbitrator's family 
members.\10\
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    \9\ See Exchange Act Rel. No. 74383 (Feb. 26, 2015), 80 FR 11695 
(Mar. 4, 2015) (File No. SR-FINRA-2014-028) (``2015 Order'').
    \10\ See id. (stating that ``the intent of the proposed rule 
change was to address concerns about arbitrator neutrality raised by 
forum users'').
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    Under the definitions as revised by the 2015 amendments, the non-
public arbitrator roster is composed of individuals who work, or 
worked, in the financial industry, or provide services to the financial 
industry or to parties engaged in securities arbitration and 
litigation. The public arbitrator roster is composed of individuals who 
do not have any significant affiliation with the financial industry. 
The public arbitrators have never been employed by the financial 
industry, do not provide services to the financial industry or to 
parties engaged in securities arbitration and litigation, and do not 
have immediate family members or co-workers who do so.\11\
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    \11\ See 2015 Order.
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    However, FINRA believes that the 2015 amendments to the arbitrator 
definitions also created an ``eligibility gap'' whereby certain 
otherwise qualified arbitrators \12\ could not serve in any capacity. 
For example, FINRA states that over 800 public arbitrators were 
disqualified from the public arbitrator roster under the revised public 
arbitrator definition. More than 100 of these disqualified arbitrators 
did not meet any of the criteria outlined in the non-public arbitrator 
definition for service on the non-public arbitrator roster. 
Accordingly, FINRA completely removed them from its arbitrator 
rosters.\13\ In addition, FINRA stated that due to the 2015 amendments 
it had to reject over 140 arbitrator applicants in 2016 who otherwise 
met FINRA's minimum arbitrator qualifications.\14\
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    \12\ Unless waived by FINRA at its discretion, arbitrator 
applicants must have a minimum of five years of paid business and/or 
professional experience and at least two years of college-level 
credits. Qualification criteria can be found at http://www.finra.org/arbitration-and-mediation/finra-arbitrators. See 
Notice, 82 FR at note 6.
    \13\ See Notice, 82 FR at 35249.
    \14\ Id.
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    Therefore, FINRA is proposing to amend Rules 12100(r) in the 
Customer Code and 13100(r) in the Industry Code to delete the specific 
criteria for inclusion on the non-public arbitrator roster. 
Specifically, the proposed rule would provide that the term ``non-
public arbitrator'' means a person who is otherwise qualified to serve 
as an arbitrator, and is disqualified from service as a public 
arbitrator. Accordingly, the proposed rule change would allow FINRA to 
appoint individuals who cannot be classified as public arbitrators to 
the non-public arbitrator roster if they meet FINRA's general 
arbitrator qualification criteria.\15\
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    \15\ Id.
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III. Comment Summary

    As noted above, the Commission received four comment letters on the 
proposed rule change, all of which supported the proposal.\16\ All four 
commenters believe that the proposal would expand the pool of 
arbitrators and provide greater choice of non-public arbitrators for 
parties during the panel selection process.\17\ One

[[Page 43437]]

commenter stated that the proposal represents ``a fair, equitable and 
reasonable approach that would facilitate the fairness and efficiency 
of the participant experience in the FINRA arbitration forum.'' \18\ 
Another commenter stated that expanding the pool of available 
arbitrators ``translates to greater party control over the process, 
[which] increases parties['] perceptions of the fairness of the 
forum.'' \19\ Similarly, another commenter stated that ``having as many 
qualified, fair, and neutral arbitrators as possible will help advance 
the integrity of the arbitration process.'' \20\
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    \16\ See supra note 4.
    \17\ Id.
    \18\ Caruso Letter.
    \19\ Pace Letter.
    \20\ PIABA Letter.
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    In addition to supporting the proposed rule change, two of these 
commenters also recommended additional changes to the FINRA arbitration 
forum designed to ``ensure a fair and efficient arbitration pool.'' 
\21\
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    \21\ PIABA Letter; see also Pace Letter.
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    One commenter recommended that FINRA consider simplifying the 
definition of ``public arbitrator'' \22\ in the Codes, which the 
commenter thinks is ``also too complicated.'' \23\ In its response, 
FINRA stated that in 2016 it did reconsider its definition of ``public 
arbitrator'' in the Codes but determined not to change it.\24\
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    \22\ See supra note 8.
    \23\ Pace Letter.
    \24\ See FINRA Letter; see also Notice at 82 FR 35249 (stating 
that the intent of the proposed rule change was to address concerns 
about arbitrator neutrality raised by forum users. For example, 
``prior to the 2015 amendments, the Codes, with specified 
exceptions, permitted former financial industry employees who ended 
their industry affiliations to qualify as public arbitrators five 
years after leaving the financial industry. Forum users raised 
concerns about the neutrality of these individuals, and indicated 
that they did not believe former industry employees should ever 
serve as public arbitrators. In response to these concerns, the 2015 
amendments eliminated the five-year cooling-off period, thereby 
classifying all former financial industry employees as non-public 
arbitrators'').
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    The second commenter recommended that FINRA amend its policies to 
lower or eliminate certain educational requirements for individuals to 
become arbitrators.\25\ Currently, unless waived, by FINRA, arbitrators 
must have at least two years of college-level credits in order to 
become an arbitrator.\26\ The commenter believes that ``[w]hether 
someone has taken college-level courses does not necessarily mean that 
such person cannot grasp the concepts being discussed and considered 
during the arbitration process.'' \27\ Alternatively, the commenter 
thinks that one's ability to understand and pass FINRA's arbitrator 
training course is sufficient to qualify as an arbitrator.\28\ In its 
response, FINRA highlighted that it has authority to waive the 
educational requirement in light of, for example, a candidate's number 
of years of employment and type of employment (e.g., his or her field 
of employment and his or her positions held). Notwithstanding its 
discretion to waive the education requirement, FINRA consulted the 
subcommittee responsible for reviewing the arbitrator application \29\ 
on the commenter's recommendation for its input.\30\ Based on these 
factors, FINRA did not agree to revise the proposal at this time.\31\
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    \25\ See PIABA Letter.
    \26\ See supra note 12.
    \27\ PIABA Letter.
    \28\ See id.
    \29\ The Neutral Roster Subcommittee of the National Arbitration 
and Mediation Committee.
    \30\ See FINRA Letter.
    \31\ Id.
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    The second commenter also recommended that FINRA continue its 
efforts to address arbitrator demographic issues.\32\ In particular, 
the commenter recommended that FINRA continue recruiting new 
arbitrators to ``help increase the diversity of the pool.'' \33\ 
Similarly, this commenter recommended that FINRA continue recruiting 
public arbitrators in small and mid-sized cities in order to expand the 
pool of public arbitrators from which parties in these areas of the 
country can make their selections.\34\ The commenter stated that ``many 
constituents of FINRA arbitration . . . have had concerns about the 
number of . . . arbitrators who are selected to serve in the arbitrator 
pool outside of their nearest arbitrator site[.]'' \35\ The commenter 
claims that these ``traveling arbitrators'' create scheduling issues 
that delay the arbitration process and ``may not understand a 
neighboring state's laws and procedures as much as a local 
arbitrator.'' \36\
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    \32\ See PIABA Letter.
    \33\ PIABA Letter.
    \34\ See PIABA Letter.
    \35\ PIABA Letter.
    \36\ Id.
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    In its response, FINRA stated that it ``has been actively 
recruiting new arbitrators, [especially in] locations with the greatest 
need.'' \37\ FINRA also agreed, however, that it should ``continue [its 
efforts] to increase its public arbitrator pool.'' \38\ In this regard, 
FINRA identified its recruiting methods, including, among other things, 
starting a program in which current FINRA arbitrators actively recruit 
arbitrator candidates, hiring national recruiters, utilizing social 
media platforms to circulate formal recruitment videos, focusing 
recruitment efforts in locations where public arbitrators are most 
needed, and targeting organizations to improve the diversity of its 
pool, such as women-focused groups and LGBTQ communities.\39\ As a 
result of these methods, FINRA identified the improvements in 
recruiting that it has made since the 2015 amendment, including 
increasing the total number of public arbitrators and increasing both 
the percentage of new arbitrators who are women and the percentage of 
new applicants who are African-American.\40\
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    \37\ FINRA Letter.
    \38\ Id.
    \39\ See FINRA Letter.
    \40\ See FINRA Letter (stating that ``[FINRA r]ecruitment 
efforts since July 2015 added approximately 596 arbitrators to the 
public arbitrator roster. . . . FINRA's latest arbitrator 
demographic survey . . . showed that FINRA had particular success in 
adding women and African-Americans to the roster. In 2016, 33 
percent of the arbitrators added were women and 14 percent were 
African-American. This represents an important improvement from the 
2015 survey results which showed that 26 percent of arbitrators 
added were women and four percent were African-American'').
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    FINRA also stated, however, that notwithstanding its efforts to 
minimize the commenter's concerns about ``traveling arbitrators,'' 
FINRA uses arbitrators in neighboring hearing locations to expand 
arbitrator pools in other locations, as needed. FINRA believes that 
this option is necessary to ``ensure an effective ratio of available 
arbitrators to open cases in each location.'' \41\
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    \41\ FINRA Letter at note 2.
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IV. Discussion and Commission Findings

    After careful review of the proposed rule change, the comment 
letters, and FINRA's response, the Commission finds that the proposal 
is consistent with the requirements of the Exchange Act and the rules 
and regulations thereunder that are applicable to a national securities 
association.\42\ Specifically, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Exchange 
Act,\43\ which requires, among other things, that FINRA 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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    \42\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \43\ 15 U.S.C. 78o-3(b)(6).
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    The Commission agrees with FINRA that amending the definition of 
public arbitrator as proposed would provide greater choice for parties 
to an arbitration to choose a panel. As stated in the Notice, the 2015 
amendments to

[[Page 43438]]

the definitions of public and non-public arbitrators disqualified over 
100 existing arbitrators from service at the FINRA forum and caused 
FINRA to reject over 140 prospective arbitrators in 2016.\44\ FINRA 
stated that the disqualified arbitrators and rejected applicants would 
otherwise have met FINRA's minimum arbitrator qualifications.\45\ The 
Commission agrees with FINRA and the commenters that the proposal 
amending the definition of non-public arbitrator would permit FINRA to 
admit these otherwise qualified individuals to its roster of 
arbitrators thus expanding parties' choice or arbitrators.\46\
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    \44\ See supra notes 13 and 14.
    \45\ Id.
    \46\ See Caruso Letter, Gitomer Letter, Pace Letter, PIABA 
Letter, and FINRA Letter.
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    In addition, the Commission agrees with FINRA that the proposed 
rule change will not result in any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. In the Notice, FINRA stated that it proposed the 2015 amendments 
to remove certain individuals from the public arbitrator roster and not 
to prevent these individuals from serving in any capacity. As stated 
above, however, the 2015 amendments resulted in the exclusion of 
formerly qualified arbitrators and prospective arbitrators from the 
FINRA roster entirely. The proposed rule change would permit these 
previously eligible persons to again serve as non-public arbitrators. 
The Commission agrees with FINRA's conclusion that increasing the 
number of qualified arbitrators benefits all parties who come before 
the forum because it ``may reduce costs that arise due to an 
insufficient pool of qualified arbitrators such as the costs associated 
with arbitrators traveling from other hearing locations.'' \47\ The 
Commission also believes that ``the proposal would impose no direct or 
indirect costs on persons previously eliminated from acting as 
arbitrators, new candidates for arbitrator, or parties accessing the 
forum'' \48\ because previously eliminated arbitrators will be 
reinstated \49\ and any prospective applicant must invest the same cost 
to apply to be an arbitrator notwithstanding the definitions of public 
and non-public arbitrator.
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    \47\ Notice, 82 FR at 35249-35250; see Caruso Letter, Gitomer 
Letter, Pace Letter, and PIABA Letter.
    \48\ Notice, 82 FR at 35250.
    \49\ Telephone conversation between Kenneth L. Andrichik, Senior 
Vice President, FINRA Office of Dispute Resolution, and Daniel 
Fisher, Branch Chief, Division of Trading and Markets, Commission, 
on September 8, 2017.
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    To note, the Commission additionally recognizes that the FINRA 
Dispute Resolution Task Force (``Task Force'') recommended that FINRA 
``monitor the application of the [2015 amended definitions of public 
and non-public arbitrators] in light of concerns that individuals with 
substantial process and subject matter expertise are stricken from the 
list of public arbitrators.'' \50\ The proposed rule change responds to 
the Task Force's concerns.\51\
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    \50\ FINRA Dispute Resolution Task Force, Final Report and 
Recommendations of the FINRA Dispute Resolution Task Force (dated 
December 16, 2015) at page 17, available at http://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf (``Task Force 
Report'').
     In July 2014, FINRA formed the Task Force to ``suggest 
strategies to enhance the transparency, impartiality, and efficiency 
of FINRA's securities dispute resolution forum for all 
participants.'' FINRA News Release, FINRA Announces Arbitration Task 
Force (dated July 17, 2014), available at http://www.finra.org/newsroom/2014/finra-announces-arbitration-task-force.
    \51\ See Status Report on FINRA Dispute Resolution Task Force 
Recommendations (dated February 8, 2017) at page 2, available at 
https://www.finra.org/sites/default/files/DR_task_report_status_020817.pdf.
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    The Commission also acknowledges that the commenters' unanimously 
supported the proposal \52\ and recognizes commenters' recommendations 
to make additional changes to the FINRA arbitration forum designed to 
``ensure a fair and efficient arbitration pool.'' \53\ However, those 
recommendations are outside the scope of this proposal.
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    \52\ See supra note 4.
    \53\ PIABA Letter; see Pace Letter.
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    With regard to one commenter's suggestion that FINRA also simplify 
the definition of public arbitrator,\54\ the Commission acknowledges 
FINRA's response that it weighed, and decided against, amending the 
public arbitrator definition so soon after amending it in 2015.\55\
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    \54\ See Pace Letter.
    \55\ See FINRA Letter.
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    With regard to another commenter's recommendations to amend FINRA 
policies to lower or eliminate its educational requirements for 
individuals to become arbitrators, the Commission acknowledges an 
individual's educational history is not necessarily determinative of 
his or her ability to serve as an arbitrator.\56\ However, the 
Commission also acknowledges that while the existing educational 
requirement sets a presumptive minimum threshold that may exclude 
otherwise appropriate candidates, FINRA has the authority to waive the 
requirement based on a candidate's overall experience.\57\ The 
Commission believes that FINRA's policies setting the minimum 
credentials for its arbitrators along with FINRA's authority to waive 
those minimums appropriately balance FINRA's interest in recruiting 
arbitrators while maintaining the integrity of its arbitration forum.
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    \56\ See PIABA Letter.
    \57\ See supra note 12; see also FINRA Letter.
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    The Commission also acknowledges this commenter's request for FINRA 
to recruit new arbitrators to expand the pool of public arbitrators in 
small and mid-sized cities from which parties can make their 
selections.\58\ In particular, the Commission acknowledges the 
commenter's concern that selecting arbitrators to serve in an 
arbitrator pool outside of their nearest arbitrator site can create 
scheduling issues that delay the arbitration process.\59\ The 
Commission also acknowledges, however, the ongoing recruitment efforts 
that FINRA has established and continues to employ in order to achieve 
this goal. In particular, the Commission notes FINRA's efforts to 
actively recruit new arbitrators in ``locations with the greatest 
need.'' \60\ For example, FINRA cites its 2017 recruitment efforts in 
Birmingham, Phoenix, Orlando, Las Vegas, Portland, Philadelphia, and 
Dallas--``smaller locations where public arbitrators are most needed.'' 
\61\
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    \58\ See PIABA Letter.
    \59\ Id.
    \60\ FINRA Letter.
    \61\ Id.
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    In addition, the Commission acknowledges the commenter's 
recommendation that FINRA continue its efforts to recruit new 
arbitrators in general to create a more diverse overall pool of 
arbitrators.\62\ The Commission also acknowledges the steps that FINRA 
has taken to help meet this goal. For instance, FINRA stated that it 
has started a program in which current FINRA arbitrators actively 
recruit arbitrator candidates, hired national recruiters, and utilized 
social media platforms to circulate formal recruitment videos.\63\ In 
addition, FINRA stated that it has focused its recruitment efforts on 
demographics that are less represented in the current arbitrator pool, 
targeting women-focused groups and LGBTQ communities.\64\ Moreover, the 
Commission acknowledges the advances that FINRA has made in improving 
the diversity of its arbitrator pool.\65\ In its response, FINRA 
identified the improvements in recruiting that it has made since the 
2015 amendments, including increasing the total number of public 
arbitrators and increasing the

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percentage of new arbitrators who are women and the percentage of new 
arbitrators who are African-Americans.\66\
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    \62\ See PIABA Letter.
    \63\ See FINRA Letter.
    \64\ Id.
    \65\ Id.
    \66\ Id.
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    Taking into consideration the comments and FINRA's responses, the 
Commission believes that the proposal is consistent with the Exchange 
Act. The Commission believes that the proposal will help protect 
investors and the public interest by, among other things, increasing 
the size and diversity of the FINRA arbitrator pool from which parties 
can select a panel. The Commission believes that expanding investor 
choice in the arbitrator selection process improves efficiency and 
enhances the integrity of the forum. In addition, the Commission 
believes that FINRA's response to commenters, as discussed in more 
detail above, appropriately addressed their concerns and adequately 
explained FINRA's reasons for declining to modify its proposal. 
Accordingly, the Commission believes that the approach proposed by 
FINRA is appropriate and designed to protect investors and the public 
interest, consistent with Section 15A(b)(6) of the Exchange Act and the 
rules and regulations thereunder.

V. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act \67\ that the proposal (SR-FINRA-2017-025), be and hereby 
is approved.
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    \67\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\68\
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    \68\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-19582 Filed 9-14-17; 8:45 am]
 BILLING CODE 8011-01-P


