[Federal Register Volume 77, Number 52 (Friday, March 16, 2012)]
[Notices]
[Pages 15824-15826]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-6386]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66575; File No. SR-FINRA-2011-067]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change Amending FINRA 
Rules 13201 (Statutory Employment Discrimination Claims) and 2263 
(Arbitration Disclosure to Associated Persons Signing or Acknowledging 
Form U4) Relating to Whistleblower Disputes in Arbitration

March 12, 2012.

I. Introduction

    On November 21, 2011, 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 to amend FINRA Rule 
13201 of the Code of Arbitration Procedure for Industry Disputes 
(``Industry Code'') to align the rule with statutes that invalidate 
predispute arbitration agreements for whistleblower disputes. 
Specifically, the proposed rule change would amend Rule 13201 to add a 
new provision to provide that a dispute arising under a whistleblower 
statute that prohibits the use of predispute arbitration agreements is 
not required to be arbitrated under the Industry Code. The proposed 
rule change would also make a conforming amendment to FINRA Rule 2263. 
The proposed rule change was published for comment in the Federal 
Register on December 12, 2011.\3\ The Commission received one comment 
letter, from the Securities Industry and Financial Markets Association 
(``SIFMA''), on the proposed rule change,\4\ and a response to SIFMA's 
comments from FINRA.\5\ The text of the proposed rule change and 
FINRA's Response Letter are available on FINRA's Web site at http://www.finra.org, at the principal office of FINRA, on the Commission's 
Web site at http://www.sec.gov, and at the Commission's Public 
Reference Room.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 65896 (Dec. 6, 2011) 
(``Notice'').
    \4\ See letter from Kevin M. Carroll, Managing Director and 
Associate General Counsel, SIFMA, dated January 3, 2012 (``SIFMA 
Letter'').
    \5\ See letter from Margo A. Hassan, Assistant Chief Counsel, 
FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated March 5, 
2012 (``Response Letter'').
---------------------------------------------------------------------------

    This order approves the proposed rule change.

II. Purpose

    The proposed rule change would amend FINRA Rule 13201 (Statutory 
Employment Discrimination Claims) of the Industry Code, and FINRA Rule 
2263 (Arbitration Disclosure to Associated Persons Signing or 
Acknowledging Form U4), to align the rules with statutes that 
invalidate predispute arbitration agreements for whistleblower 
disputes.
    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act'') \6\ amended the Sarbanes-Oxley Act of 2002 
(``SOX'') \7\ by adding a new paragraph (e) to 18 U.S.C. 1514A 
(Nonenforceability of Certain Provisions Waiving Rights and Remedies or 
Requiring Arbitration of Disputes) \8\ to provide that:
---------------------------------------------------------------------------

    \6\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203 (2010).
    \7\ Sarbanes-Oxley Act of 2002, Public Law 107-204 (2002).
    \8\ See Dodd-Frank Act Section 922(c)(2).
---------------------------------------------------------------------------

    (1) Waiver of Rights and Remedies--The rights and remedies provided 
for in this section may not be waived by any agreement, policy form, or 
condition of employment, including by a predispute arbitration 
agreement.
    (2) Predispute Arbitration Agreements--No predispute arbitration 
agreement shall be valid or enforceable, if the agreement requires 
arbitration of a dispute arising under this section.
    Prior to the Dodd-Frank Act, it was FINRA staff's articulated 
position that parties were required to arbitrate SOX whistleblower 
claims under the Industry Code.\9\
---------------------------------------------------------------------------

    \9\ See Arbitrability of Sarbanes-Oxley Whistleblower Claims by 
Laurence S. Moy, Pearl Zuchlewski, Linda A. Neilan and Katherine 
Blostein, The Neutral Corner (Volume 1--2008).
---------------------------------------------------------------------------

    In light of the changes set forth in the Dodd-Frank Act that 
invalidate predispute arbitration agreements in the case of SOX 
whistleblower disputes, the proposed rule change would amend FINRA Rule 
13201 of the Industry Code to make clear that parties are not required 
to arbitrate SOX whistleblower disputes, superseding any existing 
guidance to the contrary. While FINRA's main impetus for the proposed 
rule change was the need to update its staff's stated position on SOX 
whistleblower claims, FINRA proposed to make the rule text broad enough 
to cover any statutes that prohibit predispute arbitration agreements 
for whistleblower disputes.\10\
---------------------------------------------------------------------------

    \10\ The Dodd-Frank Act also invalidated predispute arbitration 
agreements in other whistleblower statutes, including, for example, 
7 USCA Sec.  26(n) relating to Commodity Exchange Whistleblower 
Incentives and Protections.

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

[[Page 15825]]

    Rule 13201 of the Industry Code currently provides that a claim 
alleging employment discrimination, including sexual harassment, in 
violation of a statute, is not required to be arbitrated under the 
Industry Code. Such a claim may be arbitrated only if the parties have 
agreed to arbitrate it, either before or after the dispute arose. The 
proposed rule change would amend Rule 13201 to add a new provision to 
provide that a dispute arising under a whistleblower statute that 
prohibits the use of predispute arbitration agreements is not required 
to be arbitrated under the Industry Code. The rule would state that 
such a dispute may be arbitrated only if the parties have agreed to 
arbitrate it after the dispute arose.
    FINRA also would amend the title of Rule 13201 to reflect the 
addition of the new provision relating to whistleblower disputes. FINRA 
structured the proposed rule change to separate the provision relating 
to statutory employment discrimination claims from the provision 
relating to whistleblower disputes.
    The proposed rule change also would make a conforming amendment to 
FINRA Rule 2263, which requires firms to provide each associated person 
with certain written disclosures regarding the nature and process of 
arbitration proceedings whenever the firm asks an associated person, 
pursuant to FINRA Rule 1010 (Electronic Filing Requirements for Uniform 
Forms), to manually sign a new or amended Form U4, or to otherwise 
provide written acknowledgment of an amendment to the form. The 
proposed rule change would amend FINRA Rule 2263 to add a disclosure 
provision stating that a dispute arising under a whistleblower statute 
that prohibits the use of predispute arbitration agreements is not 
required to be arbitrated under FINRA rules, and that such a dispute 
may be arbitrated at FINRA only if the parties have agreed to arbitrate 
it after the dispute arose.
    As explained in the Notice, FINRA believes that the proposed rule 
change is consistent with the provisions of Section 15A(b)(6) of the 
Act,\11\ 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. FINRA believes that the 
proposed amendments are consistent with the provisions of the Act noted 
above because they serve to align FINRA rules with those provisions in 
the Dodd-Frank Act that invalidate predispute arbitration agreements in 
the context of certain whistleblower disputes.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

III. Discussion of Comment Letters

    In the SIFMA Letter, the commenter raised three distinct concerns 
about the proposal. First, the commenter questioned FINRA's use of the 
word ``dispute'' in its proposed rule change. Specifically, the 
commenter believed that using the word ``dispute'' would allow a 
claimant in an arbitration to assert a whistleblower claim under a 
whistleblower statute in an effort to improperly remove the entire case 
(i.e., ``dispute'') from arbitration. The commenter suggested that 
FINRA replace ``dispute'' with ``claim'' because it would allow a claim 
asserted under a whistleblower statute to be severed and removed from 
the arbitration case but would not allow parties ``to avoid arbitrating 
other claims in the case that are properly subject to securities 
arbitration.''
    In the Response Letter, FINRA stated that it purposefully used the 
word ``dispute'' in the proposed rule to track the language used in the 
Dodd-Frank Act. However, FINRA also stated that it would administer the 
proposed rule in a manner that would permit an associated person of a 
member to bring a whistleblower claim in court while claims that are 
part of the same case that are properly subject to arbitration could 
remain in arbitration. FINRA also stated, however, that it would comply 
with any court order responding to an associated person's request to 
consolidate such claims. Therefore, FINRA declined to make the 
requested change.
    Second, the commenter suggested that the proposed rule should apply 
only to claims under applicable Federal whistleblower statutes instead 
of both Federal and state statutes. Specifically, the commenter 
believed that because the Federal Arbitration Act (``FAA'') ``generally 
preempts state statutes that invalidate arbitration agreements,'' it 
also generally preempts any state statutes that remove whistleblower 
claims from arbitration. Accordingly, the proposal should only apply to 
Federal whistleblower statutes.
    In its Response Letter, FINRA stated that it did not believe that 
it would be appropriate to compel a registered person to arbitrate a 
whistleblower dispute when there is a statute precluding enforcement of 
a predispute arbitration agreement, regardless of whether the statute 
is promulgated under federal or state law. FINRA further stated that it 
would continue to accept whistleblower claims under a state statute if 
the parties agreed to arbitrate the claim, or if a court ordered the 
claim to be arbitrated at the forum. Therefore, FINRA declined to make 
the requested change.
    Third, the commenter recommended that FINRA include an effective 
date in its proposal so that the rule would only be applied 
prospectively.
    In its Response Letter, FINRA stated that since Section 922 of the 
Dodd-Frank Act invalidates all predispute arbitration agreements 
relating to whistleblower disputes, FINRA believed it was inappropriate 
to establish a new effective date. Therefore, FINRA declined to make 
the requested change.

IV. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change, the 
comments received, and FINRA's response to the comments, in particular 
FINRA's representation that it would comply with a court's ruling to 
consolidate all claims (including whistleblower claims) associated with 
a particular case. Based on its 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.\12\ In particular, the Commission finds that 
the proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\13\ 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.
---------------------------------------------------------------------------

    \12\ In approving this proposed rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    More specifically, the Commission finds that that the proposed rule 
change to align FINRA Rule 13201 with statutes that invalidate 
predispute arbitration agreements for whistleblower disputes would 
ensure that a dispute arising under a whistleblower statute that 
prohibits the use of predispute arbitration agreements would not be 
required to be arbitrated.
    While the Commission appreciates the commenter's concern about 
FINRA's choice of language, the proposed rule purposefully tracks the 
language used in the Dodd-Frank Act.
    For the reasons stated above, the Commission finds that the rule 
change is consistent with the Act and the rules and regulations 
thereunder.

[[Page 15826]]

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-FINRA-2011-067) be, and it 
hereby is, approved.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-6386 Filed 3-15-12; 8:45 am]
BILLING CODE 8011-01-P