[Federal Register Volume 73, Number 244 (Thursday, December 18, 2008)]
[Notices]
[Pages 77086-77089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-30069]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59091; File No. SR-FINRA-2008-031]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Amend the 
Arbitration Uniform Submission Agreement and Related Rules

December 12, 2008.

I. Introduction

    The Financial Industry Regulatory Authority, Inc. (``FINRA'') (f/k/
a National Association of Securities Dealers, Inc. (``NASD'')) filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
on June 19, 2008, 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 amend the Uniform Submission Agreement 
(``USA''), which parties must sign prior to entering into arbitration, 
and certain rules of the Code of Arbitration Procedure for Customer 
Disputes (``Customer Code'') and the Code of Arbitration Procedure for 
Industry Disputes (``Industry Code'') that contain references to the 
agreement. The proposed rule change was published for comment in the 
Federal Register on July 16, 2008.\3\ The Commission received five 
comments in response to the proposed rule change. 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. 58124 (July 9, 
2008), 73 FR 40890 (July 16, 2008) (SR-FINRA-2008-031) (notice).

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[[Page 77087]]

II. Description of the Proposed Rule Change

    The USA is an agreement that claimants and respondents 
(hereinafter, collectively referred to as ``parties'') must sign prior 
to entering into arbitration. Rule 12302(a) of the Customer Code and 
Rule 13302(a) of the Industry Code require a claimant to file a signed 
and dated USA and a statement of claim to initiate an arbitration. 
Similarly, Rule 12303(a) of the Customer Code and Rule 13303(a) of the 
Industry Code require a respondent to directly serve each other party 
with a signed and dated USA and an answer within 45 days of receipt of 
the statement of claim. By signing the USA, the parties agree to submit 
to the arbitration process, and to be bound by the determination that 
may be rendered by the arbitrator(s).
    FINRA proposed to amend the USA to: (1) Clarify what the parties 
are attesting to when they execute the agreement; (2) require parties 
to indicate in what capacity they are signing the agreement; (3) 
convert it to a FINRA-specific agreement; and (4) use plain English to 
make the agreement easier to read. FINRA also proposed to amend the 
rules of the Customer Code and the Industry Code that refer to the USA.
    First, FINRA proposed to amend paragraph 2 of the USA to clarify 
what the parties are attesting to when they execute the agreement. 
Currently, this section states that the parties have read the 
procedures and rules relating to arbitration. FINRA stated that it 
understands that few investors who are represented by counsel actually 
read the relevant self-regulatory organization (SRO) rules (such as the 
Customer Code). Rather, in most cases, these investors are relying on 
their attorneys or other representatives to know the rules. Thus, some 
investors have been reluctant to sign a statement that they have read 
all the relevant rules. In light of these concerns, FINRA proposed to 
amend paragraph 2 to permit parties to certify that they or their 
representatives have read the relevant procedures and rules and that 
the parties agree to be bound by them. FINRA stated that it believes 
that the provision as proposed to be amended would reflect more 
accurately what the parties are attesting to when they execute the USA. 
The new language would make clear that the parties themselves are bound 
by the procedures and rules, regardless of whether they have read them 
personally.
    Second, FINRA proposed to require that parties indicate in what 
capacity they are signing the agreement. Because the USA is a contract 
between the parties and FINRA's dispute resolution forum, FINRA must 
ensure that the parties entering into the agreement have the authority 
or standing to sign the agreement. In those cases in which the 
signatory is not a named party, the signatory must state the capacity 
in which he or she is acting if other than an individual and sign in 
that capacity, so that FINRA can determine from the statement of claim 
and other supporting information whether he or she is authorized to 
enter the agreement. For example, a person signing as the trustee of a 
family trust would sign his or her name exactly as shown on the trust 
documents and then write ``Trustee'' on the line below the instruction 
``State Capacity if other than individual (example: Executor, Trustee, 
Corporate Officer).'' According to FINRA, this change would formalize 
an existing practice. Currently, if a party fails to sign the USA in 
the capacity in which he or she is submitting the claim, FINRA 
classifies the claim as deficient, which can delay the arbitration and 
increase the party's costs. FINRA stated that it believes that the 
proposed change would clarify how the agreement must be signed, and 
should help expedite the processing of claims, thereby minimizing 
unnecessary delays and expenses that parties could incur.
    Third, FINRA proposed to convert the USA into a FINRA-specific 
agreement. The USA was designed by the Securities Industry Conference 
on Arbitration (SICA) \4\ a number of years ago and was intended to be 
used by the ten SROs that offered an arbitration forum at that time. 
Thus, the language is generic and references to rules or procedures 
include broad terms to encompass the rules from the various SROs. Over 
the years, most SROs have closed their arbitration forums and 
contracted with FINRA to handle their arbitrations. In addition, on 
August 6, 2007, FINRA consolidated its dispute resolution program with 
that of the New York Stock Exchange, Inc.\5\ As a result, FINRA now 
handles over 99 percent of all arbitrations filed with SROs. In light 
of these changes, FINRA proposed to convert the USA to a FINRA-specific 
agreement by removing references to ``sponsoring organization'' and 
replacing them with references to FINRA; expressly referencing the 
FINRA Code of Arbitration Procedure; \6\ and removing the term 
``Uniform'' from the title of the agreement. FINRA stated that it 
believes these changes would minimize confusion for parties concerning 
the applicability of the form and would clarify which FINRA rules apply 
in the arbitration context.
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    \4\ SICA was formed in 1977 to develop and maintain a Uniform 
Code of Arbitration and to provide a forum for the discussion of new 
developments in securities arbitration among SRO arbitration forums 
and participants in those forums. The membership currently includes 
representatives of each securities SRO that currently sponsors an 
arbitration forum, three ``public'' members, and representatives 
from the Securities Industry and Financial Markets Association 
(SIFMA) and the North American Securities Administrators Association 
(NASAA).
    \5\ See Securities Exchange Act Release No. 56145 (July 26, 
2007), 72 FR 42169 (August 1, 2007) (SR-NASD-2007-023) (approval 
order).
    \6\ The Submission Agreement's use of the term ``FINRA Code of 
Arbitration Procedure'' means the Customer Code or the Industry 
Code, as applicable.
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    Fourth, FINRA proposed to make minor stylistic changes to the 
document, such as defining ``undersigned parties'' as ``parties'' after 
the first usage, moving the reference to cross-claims and dividing a 
long sentence in paragraph 4 into two sentences.\7\ FINRA stated that 
it believes these changes will make the agreement easier to read.
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    \7\ In the proposed definition of ``Submission Agreement'' 
(proposed NASD Rules 12100(x) and 13100(z)), FINRA did not propose 
to replace references to ``NASD Submission Agreement'' with ``FINRA 
Submission Agreement'' as part of this rule filing, because those 
changes were proposed as part of a separate rule filing (FINRA's 
Proposed Rule Change to Adopt NASD Rules 4000 Through 1000 Series 
and the 12000 Through 14000 Series as FINRA Rules in the New 
Consolidated FINRA Rulebook (SR-FINRA-2008-021) (See Exhibit 5 at 
pp. 530 and 550-551)), which was approved by the Commission but has 
not yet been implemented. See Securities Exchange Act Release No. 
58643 (September 25, 2008), 73 FR 57174 (October 1, 2008) (SR-FINRA-
2008-021) (approval order). This change, as set forth in SR-FINRA-
2008-021, will take effect on December 15, 2008. See FINRA 
Regulatory Notice 08-57 (SEC Approves New Consolidated FINRA Rules) 
(October 2008).
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    Finally, FINRA proposed to amend Rules 12100(x), 12100(y), 
12302(a)(1), (b), and (d), 12303(a) and (c), 12306(a) and (c), and 
12307(a) of the Customer Code to conform the references to the USA to 
the proposed changes to the agreement. FINRA proposed to amend Rules 
13100(z)-(bb), 13302(a)(1), (b), and (d), 13303(a) and (c), 13306(a) 
and (c), and 13307(a) of the Industry Code for the same reason.

III. Comments

    The SEC received five comments,\8\ as well as FINRA's response to 
comments,\9\ which are discussed below. Two

[[Page 77088]]

commenters supported the proposed rule change; \10\ three opposed 
it.\11\ Two commenters who opposed the proposed rule change, however, 
raised concerns that are outside the scope of the proposal.
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    \8\ See Letter from Seth E. Lipner, Professor of Law, Baruch 
College, August 6, 2008 (``Lipner Letter''); Letter from Lawrence S. 
Schultz, President, Public Investors Arbitration Bar Association, 
August 6, 2008 (``PIABA Letter''); Letter from Daniel S. Wilkerson, 
July 30, 2008 (``Wilkerson Letter''); Letter from Philip M. 
Aidikoff, Attorney, July 23, 2008 (``Aidikoff Letter''); and Letter 
from Steven B. Caruso, Esq., Maddox Hargett Caruso, P.C., July 16, 
2008 (``Caruso Letter'').
    \9\ Letter from Mignon McLemore, FINRA, dated October 29, 2008 
(``FINRA Letter'').
    \10\ Aidikoff and Caruso Letters.
    \11\ PIABA, Lipner, and Wilkerson Letters.
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Detailed Discussion of Comments and Finra Response

Certifying that Party's Representative Read the Rules
    Under the proposed rule change, parties would be permitted to rely 
on their representatives to be familiar with the rules and procedures 
of the forum. Two commenters stated that this is a positive change.\12\
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    \12\ Aidikoff and PIABA Letters.
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Removing References to Certain Rules and Corporate Documents
    FINRA proposed to make the USA specific to FINRA and to remove 
language that is overly broad or that is generic to encompass the rules 
of the various self-regulatory organizations. A commenter who opposed 
the proposed rule change argued that amending paragraph three of the 
USA to remove the requirement that the arbitration be conducted 
pursuant to the Constitution, By-Laws, Rules and Regulations of the 
sponsoring organization may eliminate FINRA's authority under its 
Conduct Rules to enforce or collect on an arbitration settlement or 
award.\13\
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    \13\ PIABA Letter.
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    FINRA stated that it disagrees with the commenter's argument for 
several reasons. Firms and associated persons are subject to FINRA's 
jurisdiction under FINRA By-Laws, regardless of whether they sign a 
USA.\14\ In addition, firms and associated persons agree again to be 
bound by the By-Laws in paragraph one of the USA. Therefore, FINRA 
stated that similar references in paragraph three of the USA are 
redundant, and that their removal will make the document easier to read 
and understand for users of its dispute resolution forum. Moreover, the 
focus in paragraph three is on the procedures under which the 
arbitration will be conducted, and the proper reference in this context 
is the FINRA Code of Arbitration Procedure. For these reasons, FINRA 
declined to amend paragraph three.
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    \14\ See By-Laws of the Corporation, Article IV, Membership, and 
Article V, Registered Representatives and Associated Persons. For a 
firm to become a member of FINRA, it must agree to comply with the 
FINRA By-Laws, the Rules of the Corporation, and all rulings, 
orders, directions, and decisions issued and sanctions imposed under 
the Rules of the Corporation. Article IV, Sec. 1(a)(1) of By-Laws. 
Article V, Sec. 2(a)(1) of the By-Laws contains a similar 
requirement for registered representatives and associated persons. 
The Code of Arbitration Procedure is included in the Rules of the 
Corporation. Article I, Sec. (w) of the By-Laws states, `` `Rules of 
the Corporation' or `Rules' means the numbered rules set forth in 
the manual of the Corporation beginning with the Rule 0100 Series, 
as adopted by the Board pursuant to these By-Laws, as hereafter 
amended or supplemented.''
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    One commenter contended that the proposed amendments to the USA do 
not define explicitly the rules and procedures to which the document 
refers, thereby making it difficult for parties to review them and 
agree to be bound by them.\15\ In particular, the commenter seeks 
``specific document names, section names, page numbers, [and] web URLs 
* * * where these rules can be found.'' \16\
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    \15\ Wilkerson Letter.
    \16\ Id.
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    FINRA responded that one of the goals of the proposal is to 
streamline the USA by using plain English to make the document easier 
to read. In keeping with this goal, FINRA eliminated redundant and 
generic references to corporate documents as described above. FINRA 
stated that inserting a detailed list of all rules and procedures that 
might possibly apply to any arbitration proceeding would make the USA 
unduly lengthy and complex for the average user of the dispute 
resolution forum. More importantly, the nature of a particular claim 
determines which rules and procedures would apply in the forum. A 
listing of all rules and procedures available in the forum may be 
confusing to investors when only some of the rules and procedures may 
apply to a particular claim. Thus, the proposed changes to the USA 
incorporate by reference the relevant rules and procedures of the 
forum, which are readily accessible on FINRA's Web site at http://www.finra.org or in hard copy upon request. FINRA stated that most 
investors will find that the Code of Arbitration Procedure and the 
packet of materials provided for claimants will provide them with all 
the necessary rules and procedures applicable to their arbitration 
proceedings. For these reasons, FINRA declined to amend the proposal to 
address this issue at this time.
Comments Outside the Scope of Proposed Rule Change
    Four commenters expressed concerns over alleged disparate treatment 
of claimants and respondents with regard to executing a USA.\17\ 
Specifically, they stated that respondents are frequently permitted to 
participate in arbitrations without ever having signed the USA, and 
that FINRA does not enforce its rules with respect to those respondents 
who fail to submit a signed USA by barring participation, or otherwise 
imposing sanctions.
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    \17\ Aidikoff, Caruso, PIABA and Lipner Letters.
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    FINRA determined that these comments are outside the scope of the 
rule filing, because FINRA is not proposing to amend the provisions of 
the Codes that address the execution requirements concerning the 
USA.\18\ FINRA responded that it does believe it is important, however, 
to correct misconceptions expressed by the commenters concerning the 
accountability of respondents when they do not execute a USA. First, as 
noted previously, firms and associated persons or registered 
representatives are subject to FINRA's jurisdiction under FINRA By-
Laws,\19\ which means that they are bound to arbitrate in the forum and 
are subject to the forum's rules and procedures. Second, Rules 12303(a) 
and 13303(a) of the Customer and Industry Codes, respectively, require 
respondents to serve each other party with a signed and dated USA. In 
addition, Rules 12307(c) and 13307(c) prohibit a panel from considering 
any counterclaim, cross claim or third party claim that is deficient, 
which includes a USA that is not properly signed and dated.\20\ Third, 
if respondents fail to submit a signed USA or otherwise object to 
jurisdiction within 30 days, arbitrators are instructed in the initial 
pre-hearing conference script to impose sanctions as provided in the 
Codes.\21\ Last, FINRA trains its arbitrators extensively on how its 
rules and procedures should be applied. With regard to respondents' 
failure to submit a USA, FINRA recently published an article in The 
Neutral Corner that addressed this issue and reminded arbitrators of 
their ability to issue sanctions for noncompliance.\22\ Therefore, 
FINRA concluded that its rules, procedures, and arbitrator training 
programs address effectively the instances in which respondents fail to 
submit a USA.
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    \18\ Rules 12302 and 12303 of the Customer Code and Rules 13302 
and 13303 of the Industry Code.
    \19\ See supra note 14.
    \20\ Also under Rules 12307(c) and 13307(c), FINRA notifies the 
party making the counterclaim, cross claim or third party claim of 
any deficiencies in writing and copies the panel.
    \21\ Rule 12212 of Customer Code and Rule 13212 of the Industry 
Code. Sanctions also can be imposed under the FINRA By-Laws if the 
matter is referred for regulatory action. See Article XIII, Powers 
of Board to Impose Sanctions.
    \22\ See The Neutral Corner, Volume 1-2008, available at http://www.finra.org/ArbitrationMediation/Neutrals/Education/NeutralCorner/P037817 (last visited Oct. 17, 2008).

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[[Page 77089]]

IV. Discussion and Findings

    After careful review of the proposed rule change, the comments 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.\23\ In particular, the Commission 
believes the proposed rule change is consistent with the provisions of 
Section 15A(b)(6) of the Act,\24\ 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. The Commission believes that the proposed rule change 
would enhance the efficiency of the forum in processing claims, by 
clarifying the terms of the agreement and improving its readability. 
Moreover, the Commission believes the proposed rule change is 
consistent with FINRA's statutory obligations under the Act to prevent 
fraudulent and manipulative practices by requiring that signers of the 
agreement indicate in what capacity they are signing, so that FINRA can 
ensure that signers of the agreement are authorized to do so.
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    \23\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition and capital 
formation. See 15 U.S.C. 78c(f).
    \24\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that FINRA has adequately responded to the 
comments regarding removal of references to certain rules and corporate 
documents. As stated above, one of the purposes of the proposed rule 
change is to convert the USA to a FINRA-specific document. In order to 
do this, FINRA proposed to remove language that is overly broad or that 
is generic to encompass the rules of the various self-regulatory 
organizations. By citing to relevant provisions of its By-Laws, FINRA 
has sufficiently explained why the removal of the requirement that the 
arbitration be conducted pursuant to the ``Constitution, By-Laws, Rules 
and Regulations'' of the sponsoring organization would not eliminate 
FINRA's authority to enforce or collect on an arbitration settlement or 
award.
    The Commission carefully considered the comment suggesting that the 
agreement should contain an explicit definition of the ``procedures and 
rules'' to which the parties agree to be bound, under paragraph two of 
the agreement. However, as noted above, another principal goal of the 
proposed rule change is to make the agreement easier to read. Since the 
Commission's oversight of the securities arbitration process is 
directed at ensuring that it is fair and efficient, the Commission 
agrees with FINRA's determination that inserting a detailed list of all 
rules and procedures that might possibly apply to any arbitration 
proceeding would make the agreement unduly lengthy and complex for the 
average user of the dispute resolution forum, and consequently, would 
hinder the goals of fairness and efficiency. Furthermore, the 
Commission believes that the commenter's concerns are addressed by the 
fact that, as FINRA pointed out, claimants can refer to the Code of 
Arbitration Procedure and the packet of materials provided for 
claimants to find all the necessary rules and procedures applicable to 
their arbitration proceedings.
    With respect to the comments regarding the alleged disparate 
treatment of claimants and respondents with regard to executing an 
agreement, the Commission believes that FINRA has adequately responded, 
by highlighting the rules, procedures, and arbitrator training programs 
that address the instances in which respondents fail to submit an 
agreement.

V. Conclusions

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-FINRA-2008-031) be, and 
hereby is, approved.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-30069 Filed 12-17-08; 8:45 am]
BILLING CODE 8011-01-P