[Federal Register Volume 75, Number 40 (Tuesday, March 2, 2010)]
[Notices]
[Pages 9459-9464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-4235]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61575; File No. SR-FINRA-2010-007]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend the 
By-Laws of NASD Dispute Resolution

February 23, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
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 
January 22, 2010, the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by FINRA. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the By-Laws of NASD Dispute 
Resolution.\3\
---------------------------------------------------------------------------

    \3\ If this proposed rule change is approved by the Commission, 
the By-Laws of NASD Dispute Resolution will be redesignated as the 
``By-Laws of FINRA Dispute Resolution.''
---------------------------------------------------------------------------

    The text of the proposed rule change is 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.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning

[[Page 9460]]

the purpose of and basis for the proposed rule change and discussed any 
comments it received on the proposed rule change. The text of these 
statements may be examined at the places specified in Item IV below. 
FINRA has prepared summaries, set forth in Sections A, B, and C below, 
of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

 1. Purpose
Background on FINRA and Its Subsidiaries
    On July 30, 2007, NASD and the New York Stock Exchange (``NYSE'') 
consolidated their member firm regulation and dispute resolution 
operations into a combined organization, FINRA.\4\ As part of the 
consolidation, the SEC approved amendments to the NASD By-Laws to 
implement governance and related changes. The resulting FINRA By-Laws 
included a FINRA Board governance structure that balanced public and 
industry representation and designated seven governor seats to 
represent member firms of various sizes based on the criteria of firm 
size.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 56145 (July 26, 
2007), 72 FR 42169 (August 1, 2007), as amended by Securities 
Exchange Act Release No. 56145A (May 30, 2008), 73 FR 32377 (June 6, 
2008) (File No. SR-NASD-2007-023).
---------------------------------------------------------------------------

    On September 8, 2008, FINRA filed a proposal with the SEC to amend 
the By-Laws of FINRA's regulatory subsidiary (``FINRA Regulation'') to 
realign the representation of industry members on the National 
Adjudicatory Council (``NAC'') to follow more closely the industry 
representation on the FINRA Board of Governors (``FINRA Board''), to 
eliminate the Regional Nominating Committees, to transfer such 
committees' responsibilities for NAC industry appointments to the FINRA 
Nominating Committee (``Nominating Committee''), and to change the name 
of ``NASD Regulation'' and ``NASD'' to ``FINRA Regulation '' and 
``FINRA'' respectively.\5\ The SEC approved the amendments to FINRA 
Regulation's By-Laws on November 6, 2008.\6\
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Rel. No. 58626 (Sept. 23, 2008), 
73 FR 56872 (Sept. 30, 2008) (File No. SR-FINRA-2008-046, Notice of 
Filing and Amendment No. 1).
    \6\ See Securities Exchange Act Rel. No. 58909 (Nov. 6, 2008), 
73 FR 68467 (Nov. 18, 2008).
---------------------------------------------------------------------------

    On March 27, 2009, FINRA filed a proposal with the SEC to amend 
further the By-Laws of FINRA Regulation to modify the FINRA Regulation 
Board (``FINRA Regulation Board'') composition, to adopt changes to 
conform the FINRA Regulation By-Laws to the FINRA By-Laws, and to 
reflect the corporate name change and similar matters.\7\ The SEC 
approved the amendments to FINRA Regulation's By-Laws on May 21, 
2009.\8\
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Rel. No. 59696 (Apr. 2, 2009), 
74 FR 16020 (Apr. 8, 2009) (File No. SR-FINRA-2009-020).
    \8\ See Securities Exchange Act Rel. No. 59962 (May 21, 2009), 
74 FR 25792 (May 29, 2009) (Order Approving SR-FINRA-2009-020).
---------------------------------------------------------------------------

    FINRA Dispute Resolution (formerly known as NASD Dispute 
Resolution) is a subsidiary of FINRA that operates according to the 
Plan of Allocation and Delegation of Functions by NASD to Subsidiaries 
(``Delegation Plan''), as amended,\9\ which NASD adopted first in 1996. 
Pursuant to the Delegation Plan, FINRA's dispute resolution subsidiary 
conducts arbitration, mediation and other dispute resolution programs 
and interprets rules and regulations pertaining to its dispute 
resolution programs.\10\ NASD Dispute Resolution's By-Laws were not 
amended at the time of the consolidation. Now that the consolidation 
has been completed and amendments to FINRA Regulation's By-Laws have 
been approved, FINRA believes NASD Dispute Resolution's By-Laws should 
be updated.
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Rel. No. 41971 (Sept. 30, 1999), 
64 FR 55793 (Oct. 14, 1999) (Order Approving a Proposed Rule Change 
by the National Association of Securities Dealers, Inc. to Create a 
Dispute Resolution Subsidiary).
    \10\ See FINRA Manual, Corporate Organization, Plan of 
Allocation & Delegation of Functions by NASD to Subsidiaries, NASD 
Dispute Resolution, Section III (A)(1)(a) and (c).
---------------------------------------------------------------------------

    In July 2007, when NASD and the NYSE consolidated their member firm 
regulation and dispute resolution operations, FINRA created a 
Regulation Policy Committee of the Board of Governors, the members of 
which are 14 Governors from FINRA's Board of Governors.\11\ The members 
of the Regulation Policy Committee also serve as the Directors of the 
FINRA Regulation and FINRA Dispute Resolution Boards of Directors.\12\ 
The Commission approved the composition of FINRA's committees when it 
approved amendments to FINRA's By-Laws on July 26, 2007.\13\ The 
Commission also approved the composition of FINRA Regulation's Board of 
Directors when it approved amendments to FINRA's By-Laws on May 21, 
2009.\14\ When the FINRA Regulation and FINRA Dispute Resolution Boards 
of Directors meet, they act in their respective capacities as directors 
of those subsidiaries. The FINRA Dispute Resolution Board of Directors 
continues to oversee the management of FINRA Dispute Resolution, 
establish policies and procedures, and monitor the use of financial 
resources, among other things.
---------------------------------------------------------------------------

    \11\ FINRA's Board of Governors consists of 21 members, 11 of 
whom are public members. See FINRA By-Laws, Article I(ss) and I(tt), 
definitions of Public Director and Public Governor, respectively. 
The Regulation Policy Committee is comprised of seven public, five 
industry, and two neutral members of FINRA's Board of Governors. The 
two neutral members are the Chief Executive Officers of FINRA and 
NYSE Regulation, Inc. FINRA's By-Laws require that FINRA's 
committees consist of a majority public members. See FINRA By-Laws, 
Article IX (Committees--Appointment), section 1(b).
    \12\ FINRA's Chair and Chief Executive Officer is an ex-officio, 
non-voting member of the FINRA Regulation and FINRA Dispute 
Resolution Boards of Directors.
    \13\ Supra note 3.
    \14\ Supra note 7.
---------------------------------------------------------------------------

Proposal To Amend NASD Dispute Resolution's By-Laws
    FINRA is proposing to amend the NASD Dispute Resolution By-Laws to: 
(1) Modify the composition of the FINRA Dispute Resolution Board; (2) 
adopt changes to conform the NASD Dispute Resolution By-Laws to the 
FINRA By-Laws; and (3) implement other conforming changes to reflect 
the corporate name change and other similar matters. The proposed 
amendments to NASD Dispute Resolution By-Laws are modeled on those of 
the FINRA and FINRA Regulation By-Laws (which, as discussed above, were 
both previously approved by the Commission), with modifications, 
described below, as appropriate to the particular functions of FINRA 
Dispute Resolution.
    The following discussion addresses the proposed amendments to NASD 
Dispute Resolution's By-Laws under the article of the By-Laws of NASD 
Dispute Resolution in which the amendments would first appear.
Amendments to Article I--Definitions
    Article I of the NASD Dispute Resolution By-Laws contains 
definitions of terms used in the By-Laws. FINRA is proposing to add to 
or amend some of these definitions.
Broker and Dealer
    FINRA is proposing to amend the definitions of ``broker'' and 
``dealer'' in Article I of the By-Laws of NASD Dispute Resolution to 
conform them to the definitions of ``broker'' and ``dealer'' in the 
Act, as amended by the Gramm-Leach-Bliley Act of 1999.\15\ As proposed, 
FINRA would incorporate by reference the definitions of the terms 
``broker'' and ``dealer'' as set forth in Sections 3(a)(4) and 3(a)(5),

[[Page 9461]]

respectively, of the Act.\16\ The SEC approved the same change to 
definitions of the terms ``broker'' and ``dealer'' in the then-NASD 
Regulation's By-Laws in March 2001.\17\ FINRA believes that the 
proposed changes to the terms ``broker'' and ``dealer'' are necessary 
to ensure that the definitions in the NASD Dispute Resolution By-Laws 
remain consistent with the definitions of the Act.
---------------------------------------------------------------------------

    \15\ Public Law 106-102, 113 Stat. 1338 (1999).
    \16\ 15 U.S.C. 78c(a)(4) and (a)(5).
    \17\ See Securities Exchange Act Rel. No. 44052 (March 8, 2001), 
66 FR 15157 (March 15, 2001) (File No. SR-NASD-01-13).
---------------------------------------------------------------------------

Corporation
    FINRA is proposing to add the term ``Corporation'' to Article I of 
the By-Laws of NASD Dispute Resolution to reflect the change of the 
Corporation's name from ``NASD'' to ``FINRA.'' \18\ Proposed Article 
I(e) would define Corporation to mean the National Association of 
Securities Dealers, Inc., the Financial Industry Regulatory Authority, 
Inc., or any future name of the entity.
---------------------------------------------------------------------------

    \18\ Supra note 3.
---------------------------------------------------------------------------

Electronic Transmission
    FINRA is proposing to add the term ``electronic transmission'' to 
Article I of the By-Laws of NASD Dispute Resolution to reflect the 
common usage of electronic transmission as a means of 
communication.\19\ The term ``electronic transmission'' would be 
defined to mean communicating or disseminating information or documents 
to individuals or entities by telegraph, telefax, cable, radio, 
wireless or other device or method. FINRA intends ``other device or 
method'' to include e-mail, text messages, and related technologies, 
for example. FINRA believes that the new definition clarifies the 
current methods FINRA uses to communicate with and disseminate 
information to individuals and entities, and gives FINRA flexibility to 
use other devices or methods as advances in technology are made.
---------------------------------------------------------------------------

    \19\ The new term ``electronic transmission'' would be added as 
proposed Article I(k) of the By-Laws of NASD Dispute Resolution.
---------------------------------------------------------------------------

FINRA Member
    FINRA is proposing to add the term ``FINRA member'' to Article I of 
the By-Laws of NASD Dispute Resolution.\20\ As proposed, the term 
``FINRA member'' would mean ``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 (``Customer Code'') or the Code of Arbitration 
Procedure for Industry Disputes (``Industry Code'', and together with 
the Customer Code, ``Codes'') and/or to be treated as members of FINRA 
for purposes of the Codes, whether or not the membership has been 
terminated or cancelled.''
---------------------------------------------------------------------------

    \20\ The new term ``FINRA member'' would be added as proposed 
Article I(o) of the By-Laws of NASD Dispute Resolution.
---------------------------------------------------------------------------

    FINRA believes the proposed change would clarify the forum's 
jurisdiction concerning a FINRA member, and would conform the 
definition in the By-Laws to that in the Customer Code and the Industry 
Code.\21\ FINRA believes that the proposed change to add the term 
``FINRA member'' is necessary to ensure that the definitions in the 
NASD Dispute Resolution By-Laws are consistent with the definitions in 
the Codes.
---------------------------------------------------------------------------

    \21\ Rule 12100(o) of the Customer Code (definition of member) 
and Rule 13100(o) of the Industry Code (definition of member). In 
July 2007, the SEC approved an amendment to the Codes to clarify the 
term ``member.'' See Securities Exchange Act Rel. No. 56029 (July 9, 
2007), 72 FR 38641 (July 13, 2007) (File No. SR-NASD-2007-038).
---------------------------------------------------------------------------

Industry Director or Industry Member and Public Director or Public 
Member
    FINRA is proposing to modify the terms ``Industry Director'' or 
``Industry member'' and ``Public Director'' or ``Public member'' in 
Articles I(k) and I(t), respectively. With regard to the term 
``Industry Director'' or ``Industry member'', the proposed rule change 
would amend the NASD Dispute Resolution's By-Laws by separating these 
definitions into two definitions for ease of reference.\22\
---------------------------------------------------------------------------

    \22\ The term ``Industry Director'' will be defined in proposed 
Article I(r); ``Industry Member'' in proposed Article I(s).
---------------------------------------------------------------------------

    FINRA is also proposing to amend the revised terms ``Industry 
Director'' and ``Industry Member'' to limit the look-back test that 
characterizes committee members as industry if they have served as an 
officer, director, or employee of a broker or dealer, among other 
reasons, to the past twelve months. The current provision uses a three-
year look-back test. The proposed change would make the definitions of 
``Industry Director'' and ``Industry Member'' under the NASD Dispute 
Resolution By-Laws consistent with the definitions of ``Industry 
Director'', ``Industry Governor'', and ``Industry committee member'' in 
the FINRA By-Laws.\23\
---------------------------------------------------------------------------

    \23\ See FINRA By-Laws, Article I(s) and I(t).
---------------------------------------------------------------------------

    The proposal would also add the term ``independent director'' to 
the portion of the definitions of ``Industry Director'' and ``Industry 
Member'' that excludes outside directors of a broker or dealer. The 
term ``independent director'' is synonymous with outside director, but 
FINRA is proposing to add it to the exclusionary clause to harmonize 
the NASD Dispute Resolution By-Laws with the definition of ``Industry 
Governor'' in the FINRA By-Laws.\24\
---------------------------------------------------------------------------

    \24\ See FINRA By-Laws, Article I(t).
---------------------------------------------------------------------------

    Similarly, FINRA is proposing to modify the term ``Public 
Director'' or ``Public member'' by separating it into two definitions 
for ease of reference.\25\ FINRA would also amend the proposed terms 
``Public Director'' or ``Public Member'' to clarify that an 
individual's service as a public director of a self regulatory 
organization does not disqualify that person from serving as a Pubic 
Director or Public Member under NASD Dispute Resolution's By-Laws.
---------------------------------------------------------------------------

    \25\ The term ``Public Director'' will be defined in proposed 
Article I(w); ``Public Member'' in proposed Article I(x).
---------------------------------------------------------------------------

    FINRA notes that the proposed changes to the definitions of 
``Industry Director'' and ``Industry Member'' as well as ``Public 
Director'' and ``Public Member'' under the NASD Dispute Resolution By-
Laws are generally consistent with similar amendments to the By-Laws of 
FINRA Regulation,\26\ which the SEC approved in November 2008.\27\ 
FINRA believes that the changes to the definitions would eliminate any 
ambiguity concerning the interpretation of the rules within the 
Corporation, and would ensure uniform application of the rules.
---------------------------------------------------------------------------

    \26\ Under the FINRA Regulation's By-Laws, the definitions of 
Industry Member and Public Member contain a reference to a NAC or 
committee member. See FINRA Regulation By-Laws, Articles I(y) and 
I(ii). The NAC is appointed and governed pursuant to FINRA 
Regulation By-Laws; FINRA Dispute Resolution does not use this 
committee, and thus, references thereto do not appear in NASD 
Dispute Resolution By-Laws.
    \27\ Supra note 5.
---------------------------------------------------------------------------

Person Associated With a Member or Associated Person of a Member
    On June 5, 2009, FINRA filed a proposed rule change to amend Rules 
12100(r), 12506(a), and 12902(a) of the Customer Code and Rule 13100(r) 
of the Industry Code to amend the definition of ``associated person,'' 
streamline a case administration procedure, and clarify that customers 
could be assessed hearing session fees based on their own claims for 
relief in connection with an industry claim.\28\ The Commission 
approved the proposal on October 26, 2009.\29\
---------------------------------------------------------------------------

    \28\ See Securities Exchange Act Rel. No. 60159 (June 22, 2009), 
74 FR 31779 (July 2, 2009) (File No. SR-FINRA-2009-041).
    \29\ See Securities Exchange Act Rel. No. 60878, 74 FR 56679 
(Nov. 2, 2009) (Notice of Filing of Amendment No. 1 and Order 
Granting Accelerated Approval of SR-2009-041, as Modified by 
Amendment No. 1).

---------------------------------------------------------------------------

[[Page 9462]]

    Under that proposal, FINRA amended the definition of associated 
person under the Codes \30\ to match the definition in FINRA's By-
Laws.\31\ The proposal amended the definition of ``person associated 
with a member'' in the Codes in two ways: (1) By inserting the word 
``other'' before the second reference to ``natural person'' to clarify 
that the definition does not include corporate entities; and (2) by 
inserting the criterion that a natural person includes someone who has 
applied for registration.
---------------------------------------------------------------------------

    \30\ Rule 12100(r) of the Customer Code and Rule 13100(r) of the 
Industry Code define ``person associated with a member'' to mean: 
(1) A natural person registered under the Rules of FINRA; or (2) A 
sole proprietor, partner, officer, director, or branch manager of a 
member, or a natural person occupying a similar status or performing 
similar functions, or a natural person engaged in the investment 
banking or securities business who is directly or indirectly 
controlling or controlled by a member, whether or not any such 
person is registered or exempt from registration with FINRA under 
the By-Laws or the Rules of FINRA.
    For purposes of the Code, a person formerly associated with a 
member is a person associated with a member.
    \31\ FINRA's By-Laws define ``person associated with a member or 
associated person of a member'' as (1) a natural person who is 
registered or has applied for registration under the Rules of the 
Corporation; (2) a sole proprietor, partner, officer, director, or 
branch manager of a member, or other natural person occupying a 
similar status or performing similar functions, or a natural person 
engaged in the investment banking or securities business who is 
directly or indirectly controlling or controlled by a member, 
whether or not any such person is registered or exempt from 
registration with the Corporation under these By-Laws or the Rules 
of the Corporation; and (3) for purposes of Rule 8210, any other 
person listed in Schedule A of Form BD of a member. See By-Laws of 
the Corporation, Article I, Definitions (rr).
---------------------------------------------------------------------------

    FINRA is proposing to implement the same changes to the definition 
of associated person of a member in the NASD Dispute Resolution By-
Laws, as have been approved recently by the Commission to same 
definitions under the Codes, to ensure uniform application of the 
definition.
Amendments to Article IV--Board of Directors
    FINRA is proposing to make limited conforming changes to Article IV 
of the NASD Dispute Resolution By-Laws to parallel more closely the 
governance structure of the FINRA Board.
Section 4.3--Qualifications
    The proposed rule change would amend Article IV, section 4.3(a) to 
reflect FINRA's current governance structure by establishing that NASD 
Dispute Resolution Board members would be drawn exclusively from the 
FINRA Board. The proposed rule change would also amend section 4.3(a) 
to streamline the composition of NASD Dispute Resolution's Board and 
implement a requirement that it contain more Public Directors than 
Industry Directors. Thus, section 4.3(a) would be amended to state that 
``the number of Public Directors shall exceed the number of Industry 
Directors.'' FINRA's By-Laws contain a similar requirement.\32\
---------------------------------------------------------------------------

    \32\ See By-Laws of the Corporation, Article VII (Board of 
Governors), section 4(a).
---------------------------------------------------------------------------

    The proposal would make other changes to Article IV, section 4.3 as 
follows:
     Re-structure the Board to remove the President of NASD 
Dispute Resolution. The President would not be deemed a Director, and 
therefore, the proposed rule change would delete several references to 
the President of NASD Dispute Resolution;\33\
---------------------------------------------------------------------------

    \33\ See NASD Dispute Resolution By-Laws, Article IV, Sections 
4.3(a) (Qualifications), 4.5 (Resignation), 4.11(c) (Meetings), 
4.13(f) (Executive Committee), and 4.13(g) (Finance Committee). 
Section 141(c)(2) of the General Corporation Law of the State of 
Delaware provides that ``[t]he board of directors may designate 1 or 
more committees, each committee to consist of 1 or more directors of 
the corporation.'' (Emphasis added). Committees of the board, 
therefore, may be comprised exclusively of board members. In 
addition, any committee of the board that is delegated any power and 
authority of the board, such as the Executive Committee, must be 
comprised exclusively of board members. See Delaware General 
Corporation Law, section 141(c)(2).
---------------------------------------------------------------------------

     Clarify that the Chair of the FINRA Board and the Chief 
Executive Officer of FINRA shall be ex-officio non-voting members of 
the Board;
     Transfer the task of selecting the Chair of the NASD 
Dispute Resolution Board from the Board members to NASD Dispute 
Resolution's stockholder;\34\
---------------------------------------------------------------------------

    \34\ See Delaware General Corporation Law section 142, which 
allows the sole stockholder to make this selection if expressly 
provided for in the By-Laws.
---------------------------------------------------------------------------

     Eliminate the requirement that the Board select a Vice 
Chair; and
     State that the stockholder will designate the Chair at the 
same time that the Directors are elected.
Section 4.4--Election
    The proposed rule change would eliminate as unnecessary the 
reference to the first meeting of NASD Regulation at which Directors 
initially were elected.
Section 4.5--Resignation
    The proposal would remove the requirement that Directors submit 
written notice of resignation to the President. Under the proposal, 
such notice would be submitted to the Chair of the Board, instead of 
the President.
Section 4.6--Removal
    The proposed rule change would transfer the authority to remove 
Directors from a majority vote of the FINRA Board to the stockholder of 
FINRA Regulation.\35\ The proposed amendment would reflect Delaware 
law, which requires that a stock corporation vest the power to remove 
directors with the stockholder.\36\
---------------------------------------------------------------------------

    \35\ The sole stockholder of the capital stock of FINRA Dispute 
Resolution, Inc. is FINRA, Inc. See Article VIII, section 8.1 (Sole 
Stockholder).
    \36\ See Delaware General Corporation Law, section 141(k). As a 
practical matter, the FINRA Board generally would be asked to pass a 
resolution authorizing an officer of FINRA to execute a sole 
stockholder consent on behalf of FINRA (who is the sole stockholder 
of FINRA Dispute Resolution) before such a consent is executed. As 
such, the FINRA Board would have a voice in the matter, but as a 
matter of Delaware law, the consent authorizing the removal must be 
executed by a duly authorized officer of FINRA in FINRA's capacity 
as sole stockholder.
---------------------------------------------------------------------------

Section 4.7--Disqualification
    In connection with the proposed change to section 4.3(a), which 
would require the number of Public Directors to exceed the number of 
Industry Directors, the proposal would also amend section 4.7 to 
clarify that when a Director is disqualified from Board service and the 
Director's remaining term is not more than six months, the Board may 
continue to operate and will not violate any compositional requirements 
if it does not replace the disqualified Director.
Section 4.8--Filling of Vacancies
    Currently, Directors of FINRA Dispute Resolution are elected 
annually at the meeting of FINRA Dispute Resolution's stockholder 
meeting or at a special meeting dedicated to Board elections.\37\ When 
the annual election of Directors is not held on the designated date, 
the NASD Dispute Resolution By-Laws charge the Directors to ``cause 
such election'' to be held.\38\ The proposed rule change would confirm 
that the same process should be used by the FINRA Dispute Resolution 
Board when filling vacancies among its ranks. Thus, the proposal would 
amend section 4.8 to provide that the FINRA Board shall ``cause the 
election'' of a qualified Director to fill the vacant position.\39\
---------------------------------------------------------------------------

    \37\ See current NASD Dispute Resolution By-Laws, Article IV, 
section 4.4 (Election).
    \38\ Id.
    \39\ Pursuant to Delaware law, FINRA, as the sole stockholder of 
FINRA Dispute Resolution, has the authority to execute a stockholder 
consent electing an individual to the fill the vacancy pursuant to 
directions of the FINRA Board. Alternatively, the FINRA Board may 
pass a resolution making it known who they would like appointed to 
fill the vacancy. Under this scenario, it is likely that the 
remaining members of the FINRA Dispute Resolution Board will follow 
the advice of its controlling stockholder and elect the recommended 
individual. See Delaware General Corporation Law, section 223.

---------------------------------------------------------------------------

[[Page 9463]]

Section 4.9--Quorum and Voting
    The proposed rule change would remove a cross-reference to section 
4.14(b) in the quorum provision, and also amend the provision to 
clarify that, when there is a quorum, a majority vote of the Directors 
present at a meeting constitutes action of the Board.
Section 4.12--Notice of Meetings; Waiver of Notice
    The proposal would clarify the conditions under which the NASD 
Dispute Resolution Board may meet. The current NASD Dispute Resolution 
By-Laws instruct that a Director may waive notice of a Board meeting by 
being present at the meeting, so long as the Director did not attend 
the meeting solely to object to the meeting taking place.\40\ FINRA is 
proposing to amend section 4.12(c) to clarify that a Board meeting is a 
legal meeting if all Directors are present and no Director is present 
solely for the purpose of objecting to the meeting taking place.
---------------------------------------------------------------------------

    \40\ See current NASD Dispute Resolution By-Laws, Article IV, 
section 4.12(b) (Notice of Meeting; Waiver of Notice) and Article 
IX, section 9.3(b) (Waiver of Notice).
---------------------------------------------------------------------------

    The proposed rule change also would amend section 4.12(a) and (b) 
to replace the phrase ``telegraph, telefax, cable, radio, or wireless'' 
with the new term ``electronic transmission.'' \41\ For an explanation 
of the term ``electronic transmission,'' see the discussion under 
``Amendments to Article I--Definitions'' above.
---------------------------------------------------------------------------

    \41\ FINRA proposed similar changes to Article IV, Section 4.12 
(Notice of Meeting; Waiver of Notice) and Article XII, Section 12.3 
(Waiver of Notice) of the FINRA Regulation By-Laws. See Securities 
Exchange Act Rel. No. 59696 (April 2, 2009), 74 FR 16020 (April 8, 
2009) (File No. SR-FINRA-2009-020).
---------------------------------------------------------------------------

Section 4.13--Committees
    As explained under the discussion of section 4.3(a), the proposal 
would implement a requirement that the FINRA Dispute Resolution Board 
contain more Public Directors than Industry Directors.\42\ In 
furtherance of this change, references throughout Article IV to 
balancing ``Industry'' and ``Non-Industry'' Board members would be 
replaced with references to balancing ``Industry'' and ``Public'' Board 
members. Similarly, the proposal would remove the requirement that the 
Executive Committee include at least one Non-Industry Member and 
institute the requirement that Public Directors shall exceed Industry 
Directors on FINRA Dispute Resolution's Executive Committee of the 
Board.\43\
---------------------------------------------------------------------------

    \42\ See also proposed Article I(r) (Industry Director); 
proposed Article I(s) (Industry Member); proposed Article I(w) 
(Public Director); and proposed Article I(x) (Public Member).
    \43\ See Article IV, section 4.12(f) (Executive Committee).
---------------------------------------------------------------------------

Section 4.15--Action Without Meeting
    The proposal would make a related change to section 4.15 to 
eliminate the requirement that unanimous consent for taking action 
without a meeting specifically be in writing and filed with the minutes 
of the meeting. Instead, the proposal would require the consent to be 
``in accordance with applicable law,'' which in the instance of FINRA 
Dispute Resolution, would be Delaware law.
    FINRA believes that the proposed amendments to Article IV would 
align FINRA Dispute Resolution's Board structure with that of FINRA and 
its other subsidiary, and conform FINRA Dispute Resolution's corporate 
practices to Delaware law.
Amendment to Article V--Officers, Agents, and Employees
Section 5.1--Officers
    As explained under the discussion of Article IV, section 4.3, the 
proposed rule change would re-structure the Board to remove the 
President of FINRA Dispute Resolution as a Director of the Board.\44\ 
In connection with this change, the proposal would remove a reference 
to the President from section 5.1, so that the amended language would 
state, in relevant part, that none of the officers need to be Directors 
of FINRA Dispute Resolution.
---------------------------------------------------------------------------

    \44\ Supra note 32.
---------------------------------------------------------------------------

Amendments to Article VIII--Capital Stock
Section 8.3--Signatures
    The proposed rule change would amend several provisions regarding 
FINRA Dispute Resolution's capital stock. Currently, under section 
8.3(a), FINRA's approach to the corporate law issue of signing 
certificates representing shares of FINRA Dispute Resolution capital 
stock is to have these shares signed by FINRA Dispute Resolution 
officers. Under the proposed re-structuring of the Board, FINRA Dispute 
Resolution would not have an officer as Chair of the Board. Thus, FINRA 
is proposing to remove the provision that permits the Chair of the 
Board to sign stock certificates, and limit the authority to sign such 
certificates to the President, Vice President, Secretary or Treasurer 
of FINRA Dispute Resolution.
    FINRA is proposing to amend section 8.3(b) to remove the 
limitations on the type of signatures required on certificates of 
capital stock. The current provision states, in relevant part, that 
``if any such certificates are countersigned by a transfer agent other 
than NASD Dispute Resolution or its employee, or by a registrar other 
than NASD Dispute Resolution or its employee, any other signature on 
the certificate may be a facsimile.'' The proposed amendment would 
eliminate limitations on when signatures on certificates representing 
shares of FINRA Dispute Resolution's capital stock may be facsimiles 
and permit any signature to be a facsimile. Thus, under the proposal, 
the provision would be amended to state that ``any signature on the 
stock certificate may be a facsimile.'' FINRA believes this change 
would be consistent with current practice that permits its certificates 
representing capital stock to be sealed with a facsimile of FINRA 
Dispute Resolution's corporate seal.
Section 8.4--Stock Ledger
    Currently, section 8.4(a) of the NASD Dispute Resolution By-Laws 
requires that the FINRA Dispute Resolution Secretary, or another 
officer, employee, or agent, keep a record of FINRA Dispute 
Resolution's capital stock ownership and ``the number of shares 
represented by each such certificate.'' FINRA is proposing to change 
several references to ``capital stock'' to ``certificates representing 
shares of capital stock'' or similar constructions, instead of 
``certificates for shares of capital stock.'' \45\ This change would 
make NASD Dispute Resolution's By-Laws more consistent with the 
language of the applicable section of the General Corporation Law of 
the State of Delaware.\46\
---------------------------------------------------------------------------

    \45\ The proposal would delete as imprecise the words 
``certificates for'' in the discussion of potential registration of 
shares of capital stock. See proposed NASD Dispute Resolution By-
Laws, Article VIII, section 8.4(b) (Stock Ledger), 8.5 (Transfers of 
Stock), 8.6 (Cancellation), and 8.7 (Lost, Stolen, Destroyed, and 
Mutilated Certificates).
    \46\ See Delaware General Corporation Law section 158.
---------------------------------------------------------------------------

Amendments to Article IX--Miscellaneous Provisions
Section 9.3--Waiver of Notice
    FINRA is proposing to amend section 9.3(a) of the NASD Dispute 
Resolution By-Laws to replace the phrase ``telegraph, telefax, cable, 
radio, or wireless'' with the new term ``electronic transmission.'' 
\47\
---------------------------------------------------------------------------

    \47\ See supra note 40, and the explanation of the term 
``electronic transmission'' under ``Amendments to Article I--
Definitions.''

---------------------------------------------------------------------------

[[Page 9464]]

Conforming Changes Relating to the New FINRA Name and Other Technical 
Changes
    FINRA is proposing to implement certain other non-substantive 
changes to all articles of the NASD Dispute Resolution By-Laws. The 
proposed rule change would make certain non-substantive changes to the 
NASD Dispute Resolution By-Laws as follows:
     ``The NASD'' or ``NASD'' would be replaced with ``FINRA'' 
or ``the Corporation;''
     ``NASD Dispute Resolution'' would be changed to ``FINRA 
Dispute Resolution;''
     ``The Rules of the Association'' would be replaced with 
``the Rules of the Corporation;''
     ``National Nominating Committee'' would be replaced with 
``Nominating Committee;''
     A reference to ``FINRA Regulation'' would be added; and
     ``Association'' would be replaced with ``Corporation.''
    FINRA is also proposing to amend Article II, section 2.1 to change 
the name and address of the registered agent from The Corporation Trust 
Company, 1209 Orange Street, Wilmington, DE 19801 to Corporation 
Creations Network Inc., 1308 Delaware Avenue, Wilmington, DE 19806.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A of the Act, including Section 15A(b)(2) of 
the Act,\48\ in that it provides for the organization of FINRA and 
FINRA Dispute Resolution in a manner that will permit FINRA to carry 
out the purposes of the Act, to comply with the Act, and to enforce 
compliance by FINRA members and persons associated with FINRA members 
with the Act, the rules and regulations thereunder, FINRA and NASD 
rules and the Federal securities laws. FINRA further believes that the 
proposed rule change is consistent with Section 15A(b)(4) of the 
Act,\49\ which requires, among other things, that FINRA's rules assure 
a fair representation of its members in the selection of its directors 
and administration of its affairs and provides that one or more 
directors shall be representative of issuers and investors and not be 
associated with a member of FINRA, broker or dealer. FINRA believes 
that the proposed composition of its Dispute Resolution Board would 
fairly and effectively represent users of the dispute resolution forum, 
and would help resolve dispute resolution issues in a manner that will 
redound to the benefit of investors.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78o-3(b)(2).
    \49\ 15 U.S.C. 78o-3(b)(4).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received by FINRA.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-FINRA-2010-007 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2010-007. This 
file number should be included on the subject line if e-mail 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. 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 available 
publicly. All submissions should refer to the File Number SR-FINRA-
2010-007 and should be submitted on or before March 23, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\50\
---------------------------------------------------------------------------

    \50\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-4235 Filed 3-1-10; 8:45 am]
BILLING CODE 8011-01-P