[Federal Register Volume 75, Number 135 (Thursday, July 15, 2010)]
[Notices]
[Pages 41262-41264]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-17275]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62480; File No. SR-FINRA-2010-022]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change Relating To
Amending the Codes of Arbitration Procedure To Increase the Number of
Arbitrators on Lists Generated by the Neutral List Selection System
July 9, 2010.
On April 29, 2010, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and
Rule 19b-4 thereunder,\2\ a proposed rule change. The proposed rule
change was published for comment in the Federal Register on May 26,
2010.\3\ The Commission received six comments on the rule proposal.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Rel. No. 62134 (May 19, 2010),
75 FR 29594 (May 26, 2010) (File No. SR-FINRA-2010-022).
\4\ See Submission via SEC WebForm from A. M. Miller, dated May
6, 2010 (``Miller comments''); Submission via SEC WebForm from
Steven B. Caruso, Maddox Hargett Caruso, P.C., dated May 27, 2010
(``Caruso comments''); Letter to Elizabeth M. Murphy, Secretary,
Commission from Patricia Cowart, Chair, Arbitration Committee,
Securities Industry and Financial Markets Association, dated May 27,
2010 (``SIFMA letter''); Submission via SEC WebForm from Leonard
Steiner, Steiner & Libo, P.C., dated May 27, 2010 (``Steiner
comments''); Letter to Elizabeth M. Murphy, Secretary, Commission
from Scott R. Shewan, President, Public Investors Arbitration Bar
Association, dated June 14, 2010 (``PIABA letter''); and Letter to
Elizabeth M. Murphy, Secretary, Commission from Jill I. Gross,
Director, Ed Pekarek, Clinical Law Fellow, and Jeffrey Gorenstein,
Student Intern, Pace Law School Investor Rights Clinic, dated June
16, 2010 (``PIRC letter'').
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I. Description of the Proposed Rule Change
FINRA proposed to amend Rules 12403 and 12404 of the Code of
Arbitration Procedure for Customer Disputes (``Customer Code'') and
Rules 13403 and 13404 of the Code of Arbitration Procedure for Industry
Disputes (``Industry Code'') to increase
[[Page 41263]]
the number of arbitrators on each list generated by the Neutral List
Selection System (``NLSS'').
The NLSS is a computer system that generates, on a random basis,
lists of arbitrators from FINRA's rosters of arbitrators (i.e., public,
non-public, and chair rosters) for each arbitration case. The parties
select their panel through a process of striking and ranking the
arbitrators on the lists. Currently, FINRA sends the parties lists of
available arbitrators, along with detailed biographical information on
each arbitrator. In a three-arbitrator case, other than one involving a
dispute among members, the parties receive three lists of eight
arbitrators each--one public, one chair-qualified and one non-public.
Each party is permitted to strike up to four of the eight names on each
list and ranks the remaining names in order of preference. FINRA
appoints the panel from among the names remaining on the lists that the
parties return.\5\
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\5\ In an arbitration between members, the panel consists of
non-public arbitrators, and so the parties receive a list of 16
arbitrators from the FINRA non-public roster, and a list of eight
non-public arbitrators from the FINRA non-public chairperson roster.
See FINRA Rules 13402 and 13403. Each separately represented party
may strike up to eight of the arbitrators from the non-public list
and up to four of the arbitrators from the non-public chairperson
list. See FINRA Rule 13404.
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When there are no names remaining on a list, or when a mutually
acceptable arbitrator is unable to serve, a random selection is made to
``extend the list'' by generating names of additional arbitrators to
complete the panel. Parties may not strike the arbitrators on the
extended lists, but they may challenge an arbitrator for cause (e.g.,
on the basis of conflict of interest).
Prior to 2007, FINRA permitted parties unlimited strikes of
proposed arbitrators on lists. This often resulted in parties
collectively striking all of the arbitrators on each list generated
through NLSS. When this occurred, staff would use NLSS to ``extend the
list'' by generating names of additional arbitrators to complete the
panel. Parties expressed concern about extended list arbitrator
appointments because they could not strike arbitrators from an extended
list. In response to this concern, in 2007, FINRA changed the
arbitrator appointment process through a rule change that limited the
number of strikes each party may exercise to four, in an effort to
reduce the frequency of extended list appointments.\6\ Under the
current rule, FINRA permits each party to strike up to four arbitrators
from each list of eight arbitrators generated through NLSS and up to
eight arbitrators from each list of 16 arbitrators generated through
NLSS. The rules limiting strikes have significantly reduced extended
lists and thus increased the percentage of cases in which FINRA
initially appoints arbitrators from the parties' ranking lists.
However, after each side exercises its strikes, typically only one or
two persons remain eligible to serve on a case. Therefore, when FINRA
grants a challenge for cause or an arbitrator withdraws, FINRA often
must appoint the replacement arbitrator using an extended list. Forum
users, including both investor and industry parties, continue to
express concerns about extended list appointments.\7\
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\6\ Exchange Act Release No. 55158 (January 24, 2007), 72 FR
4574 (January 31, 2007) (File No. SR-NASD-2003-158).
\7\ The rationale for the proposed rule change was confirmed in
a telephone conversation between Margo Hassan, FINRA Dispute
Resolution, and Joanne Rutkowski, Division of Trading and Markets,
Commission, May 18, 2010.
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As a result of these concerns, FINRA proposed to amend Rule 12403
of the Customer Code to expand the number of arbitrators on each list
(public, non-public, and public chairperson) generated through NLSS
from eight arbitrators to 10 arbitrators. Thus, in every two party
case, at least two arbitrators would remain on each list after
strikes.\8\ FINRA stated that the additional number of arbitrators will
increase the likelihood that the parties will get panelists they chose
and ranked, even when FINRA must appoint a replacement arbitrator.
FINRA also stated that, in cases with more than two parties, expanding
the lists from eight to 10 arbitrators should significantly reduce the
number of arbitrator appointments needed from extended lists.\9\
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\8\ FINRA did not propose to expand the number of allowable
strikes for each party.
\9\ Under the rules, each ``separately represented'' party is
entitled to strike four arbitrators from an eight arbitrator list.
If, for example, a case involves a customer, a member and an
associated person, and each party is separately represented, even
with 10 arbitrators there is a chance that all of the arbitrators
will be stricken from the list.
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FINRA also proposed to amend Rule 13403 of the Industry Code to
expand the number of arbitrators on lists generated through NLSS.\10\
For disputes between members, FINRA would expand the number of
arbitrators on the non-public chairperson list generated through NLSS
from eight arbitrators to 10 arbitrators and the number of arbitrators
on the non-public list from 16 arbitrators to 20 arbitrators. For
disputes between associated persons, or between or among members and
associated persons, FINRA would expand the number of arbitrators on
each list (public, non-public, and public chairperson) generated
through NLSS from eight arbitrators to 10 arbitrators.
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\10\ Again, FINRA did not propose to expand the number of
allowable strikes for each party.
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FINRA considered whether increasing each list of arbitrators would
be unduly burdensome for parties since parties would be reviewing the
backgrounds of additional arbitrators during the ranking and striking
stage of the arbitrator appointment process. In instances where FINRA
appoints arbitrators by extended lists, parties still need to review
arbitrators' backgrounds to determine, for example, whether to
challenge an extended list arbitrator for cause. FINRA staff discussed
expanding the lists with both investor and industry representatives,
and asked the representatives to address the potential burden of
reviewing additional arbitrators. The representatives uniformly stated
that they would prefer to review additional arbitrators at the ranking
and striking stage of the arbitrator appointment process in order to
reduce the incidences of extended list appointments.
II. Summary of Comments
The Commission received six comments regarding the proposed rule
change. On June 21, 2010, FINRA submitted a response to the
comments.\11\
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\11\ See Letter to Elizabeth M. Murphy, Secretary, Commission
from Margo A. Hassan, Assistant Chief Counsel, FINRA Dispute
Resolution, Financial Industry Regulatory Authority, dated June 21,
2010 (``FINRA response'').
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All of the commenters support the proposed rule change, either in
whole or with certain modifications. The PIABA letter states that
``this rule change is important because it will reduce the number of
instances in which an arbitrator is appointed with no input from or
approval by the parties.'' The SIFMA letter states that the proposal
``will increase the likelihood that all arbitrators appointed to a case
will have been selected by the parties, result in fewer administrative
`extended list' appointments, and enhance party choice and satisfaction
with the selection process.'' Likewise, PIRC supports the proposal
``because it increases the parties' ability to present their dispute to
an arbitrator of their own choosing,'' \12\ and the Caruso comments
state that the proposed rule change ``would provide investors with
greater control and choice over the individuals who will ultimately be
appointed to serve on the arbitration panels'' and urges the Commission
to approve the proposal on an expedited basis.
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\12\ See PIRC letter.
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[[Page 41264]]
The Steiner comments suggest limiting the current proposal to cases
in which there is only one respondent or multiple respondents being
represented by only one attorney.\13\ The Steiner comments also ask
that: (1) FINRA be ordered to effectuate immediately additional
modifications to eliminate the portions of Rule 12404 that give each
separately represented respondent a separate set of strikes, and to
replace those portions with provisions that the amount of strikes that
may be exercised by respondents in total cannot exceed the amount of
strikes that can be exercised in total by the claimant; (2) that FINRA
be ordered immediately to rescind its interpretation of Rule 12404 that
permits even non-appearing respondents from participating in the
arbitrator selection process; and (3) that FINRA be ordered to
immediately propose a rule change providing that instead of appointing
a cram down arbitrator that a new selection list be sent to the
parties. FINRA notes that it is not proposing to amend its rules
relating to party strikes, participation in arbitrator selection, or
extended list appointments and that, therefore, the comments are
outside the scope of the proposed rule change.\14\
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\13\ PIRC supports the proposed rule change, and advocates a
further rule revision that would give four strikes per side, rather
than to each ``separately represented party.'' See id.
\14\ See FINRA response.
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III. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
association.\15\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Act,\16\ in
that it is designed, among other things, to prevent fraudulent and
manipulative acts and practices; to promote just and equitable
principles of trade; to remove impediments to and perfect the mechanism
of a free and open market and a national market system; and, in
general, to protect investors and the public interest.
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\15\ In approving the proposed rule change, the Commission has
considered the rule change's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\16\ 15 U.S.C. 78o-3(b)(6).
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The Commission believes that the proposed rule change will protect
investors and the public interest by providing investors greater
control in the arbitrator selection process. Forum users have
criticized extended list appointments and asked FINRA to reduce the
number of arbitrators appointed in this way. Expanding the number of
arbitrators on lists generated through NLSS should help to reduce
extended list appointments and so increase the likelihood that
arbitrators from each initial list would remain on the list after the
parties complete the striking and ranking process. This, in turn,
should enhance investor and industry participants' confidence in the
arbitration process. Concerning the requests in the Steiner comments
that FINRA be ordered to take certain actions, the Commission finds
that requested actions are beyond the scope of the current rulemaking.
IV. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act and the rules and regulations
thereunder applicable to a national securities association.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-FINRA-2010-022) be and
hereby is approved.
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\17\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-17275 Filed 7-14-10; 8:45 am]
BILLING CODE 8010-01-P